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Guidelines to Avoid Investment Fraud

This is supposed to be the best time of your life. You’ve made all the right financial moves. You think you’re fiscally fit. And now it’s time to sit back, relax and reap the benefits of a job well done.

Wait. Not so fast. Before you start making any more tweaks to your portfolio to get the maximum return for your investment dollar, beware. You could be undoing a lifetime of financial planning.

According   to a recent survey commissioned by the National Association of Securities Dealers (NASD), many investors lack the time or interest to learn the basic concepts of investing.  This makes them targets for investment fraud.

To address this problem, securities attorney Jane L. Stafford of Stafford & Associates in Kansas City, Mo., created the Investor Literacy Company. The company teaches simple investment safeguards to investors at all levels of sophistication, helping to ensure that an investor’s nest egg is promptly available to them when needed.

While each investor’s situation is different, the same basic guidelines apply, Stafford says.

Educate yourself

Every investor should become familiar with three key websites that are filled with educational information and helpful tools: the U.S. Securities Exchange Commission site at https: //www.sec.gov/,   the   NASD   at  https://www.nasd.com/, and the site for the Offices for the Securities Commission in your state. Each of these sites is up- dated regularly, Stafford says.

Research your broker

Stafford suggests that investors research the broker and their supervisor, as well as the brokerage firm and branch office itself, and not be swayed by large advertising campaigns or word-of-mouth. A good place to start is the NASD website, which allows investors to run a free “Broker Check.” Additionally, many state securities offices provide free broker snapshots.

“You’ll find details on the broker’s licenses, employment history, length of time in the industry, and whether there have been any claims or lawsuits filed,” Stafford  says. “All you need is the name of the broker and his or her employer or firm.”

Beware variable annuities

In June 2004, the NASD and the SEC issued a joint report condemning the rampant abuse of variable annuity sales. Many brokers favor variable annuities, which are similar to life insurance, because they earn them high commissions. Stafford warns against them. “Variable annuities are simply not appropriate for most investors. They are meant strictly as a long-term investment.”

Whether a variable annuity is right for you depends on your individual financial profile.  Make sure you fully understand the variable annuities’ features and the alternative choices before purchasing one.

Read before you sign

Reading every document you sign is not rude; it is smart business. Stafford advises, “You have an obligation to yourself to read and understand every document before you sign it. If you don’t understand something, ask for an explanation until you do. Also, make sure that the document you are signing is complete.”

Understand your broker’s role

The law allows brokers to call themselves many things, including “financial advisors.”  Yet brokers who sell only investment products that their parent company manages are, obviously, biased.  Investors need to understand these biases, Stafford says, to make wise investment decisions.

“Financial advisors are not obligated to disclose their biases, so make sure you ask plenty of questions and conduct the necessary research before you invest,” Stafford says.

Be diligent

Stafford recommends investors review each account statement for accuracy. “You’d be surprised how many people just throw them in a drawer,” she says. “If you don’t understand the statement, ask your broker for help.”

Brokers are required to correct transactional mistakes, so look for any unauthorized trades or other inaccuracies on your statement, make sure they are corrected.

Finally, if you think your funds have been mismanaged, speak up. “There are professionals who can help if you’ve been defrauded by an unscrupulous or incompetent broker,” Stafford says.

Originally Published on GRAND Magazine in July-August 2006

Christine Crosby

About the author

Christine is the co-founder and editorial director for GRAND Magazine. She is the grandmother of five and great-grandmom (aka Grandmere) to one. She makes her home in St. Petersburg, Florida.

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