How to spot an investment scam: Information hygiene

scam warning of lock on phone

The pandemic showed the power of a previously unknown virus to spread through the global population, threatening health and creating economic mayhem. But few people appreciate the power and ability of bad information to go viral in a similar way, endangering their wealth.

Globally, regulators are warning of an increase in financial disinformation and outright scams, fuelled by the growth of social media use, the failure of traditional media gatekeepers, rising isolation during the pandemic and the human propensity to fall for get-rich-quick pitches.

This means people are losing billions of dollars annually by acting on unreliable information, often spread by bad actors through digital media channels.

So just as we learned during the pandemic about maintaining good hygiene and consulting health professionals, the explosion of financial disinformation highlights the importance of sticking to sound investment principles and having a trusted financial adviser on your side.

The growth of scams

Nearly every week, a financial regulator somewhere alerts people to yet another scam, each seemingly more sophisticated than the previous.

In New Zealand, the Financial Markets Authority (FMA) says investment scams have targeted about 20% of the population. Among the latest scams is a rogue operator claiming to be NZ Super Fund, making unsolicited offers to purchase cryptocurrency assets, with a small up-front payment.[1]

The Australian Competition and Consumer Commission (ACCC) says losses to bond investment scams nearly tripled in the first half of 2022. Consumers lost more than $20mn to imposters impersonating banks and claiming to offer government bonds or term deposits.[2]

Overall, scams robbed Australians of a record $2bn in 2021, the ACCC says, with investment information scams the highest loss category.

Indicating that this is a global phenomenon, the US Securities and Exchange Commission (SEC) recently charged 11 individuals in a fraudulent crypto pyramid and Ponzi scheme that raised more than $300mn from millions of retail investors worldwide.[1]

Aside from crypto scams, regulators in the UK have noted a significant rise in scammers taking advantage of the growing use of digital communication tools during the pandemic. Specifically, the Financial Conduct Authority found that perpetrators are using screen-sharing software to take control of victims’ computers, steal their passwords and drain their bank accounts.[2]

These rogue operators have become so sophisticated that in some cases when investors seek to retrieve their money, the scammers impersonate recovery agents who offer the victims help in getting their money back…in exchange for a fee.

The rise of social media

But outright fraud is not the only information threat to investors. The demise of the gatekeeping role of traditional media and the rise of unverified and unedited social media content can encourage people into short-term trading, often based on unreliable rumours and opinions.

The ‘meme stock’ boom took off during the pandemic as people stuck at home started trading popular stocks using cheap or free trading apps and sharing information on social media channels.

Social media has also created a new type of financial celebrity known as the ‘finfluencer’. These are people, often without qualifications, who offer advice on anything from buying a house to setting up a budget or building a global stock portfolio.

In Australia, the corporate regulator has warned social media influencers, reminding them that, like any licensed financial adviser, they are still subject to the laws related to discussing financial products and services.[3]

It should be emphasised that social media in itself is not entirely a malign phenomenon. In many ways, it democratises access to information. But it also carries risks for users who assume that all the information they find there can be trusted and reliably acted upon.

Again, this highlights the value that a trusted financial adviser brings acting as an information filter and understanding the needs and goals of each individual client.

We all need to remember that exercising information hygiene habits to protect our wealth is just as important as the lessons we adopted during the pandemic to protect our health. These information habits include the following:

  • If an investment opportunity sounds too good to be true, you should exercise scepticism. Offers of ‘high return-low risk’ should set off alarm bells.
  • Be wary of any unsolicited offer or unexpected contact, particularly if it comes via a social media platform.
  • Tighten up your privacy controls on social media and protect yourself from identity theft. Do not share your screen with someone you have never met.
  • Use trusted, established sources for financial information as much as possible.
  • Limit your media consumption. Just because you can check news headlines and your portfolio 24/7 doesn’t mean that you should.
  • Banks and other financial institutions will never ask for passwords or sign in information through email or over the phone. Do not share this information with anyone.
  • Where possible, enable 2 Factor Authentication. Getting a code sent to your phone or through an app is a simple way to significantly strengthen your security settings.

Most importantly, speak with your financial adviser who understands your needs, circumstances, goals and risk appetites.

Article provided by Jim Parker, Dimensional Fund Advisors (DFA) and Jack Craig, Cambridge Partners.

21 October 2022

1 ‘Scam Operation Targeting New Zealanders’, FMA, 31 Aug 2022

2 ‘Consumers Warned About Fake Investment Opportunities’, ACCC, 3 Aug 2022

3 ‘SEC Charges 11 Individuals in $300m Crypto Pyramid Scheme’, SEC, 1 Aug 2022

4 ‘Screen Sharing Scams’, Financial Conduct Authority, 5 May 2022

5 ‘Information for Social Media Influencers and Licensees’, ASIC, 21 March 2022

Article provided by Consilium.

Disclaimer: Information as at 21 October 2022. This article is general information and does not consider your financial situation or goals and does not constitute personalised advice. Please contact your financial adviser for advice specific to your situation. There are no warranties, expressed or implied, regarding the accuracy or completeness of any information included as part of this article.

Share This Post

This website requires cookies

For more information, please click the ‘Read More’ button. To accept cookies from this site, please click the ‘Agree’ button.