Tuesday, August 10, 2010

Guest Article: Protect Your Wealth Against Common Investment Scams!

Individuals with significant wealth face a difficult decision. On one hand, even Warren Buffet recognizes that is wealth really needs to be invested in order to produce further gains, but most wealthy investors are oftentimes not sure where to turn. Of course, financial advisors should always be the first stop. However, there are numberless con artists and fraudulent financial firms that specifically target the wealthy; thus, it is best to be fully aware of this potential threat. By simply following a few practical steps, one can take great strides toward protecting one’s wealth against fraud.

The Guaranteed Return

In recent years, this investment scam has become increasingly popular in financial circles. Typically, a trader will offer investors a set return each month on any principal investment. Usually, the guaranteed return will be between 1% and 2% per month. The trader solicits funds in this manner, and it usually spreads by word of mouth. Eventually the trader has several million dollars under “management.” Each month he is paying out the relatively small interest payments to investors. At the same time, he is usually not trading the capital at all in a forex account, but instead withdrawing it to finance a luxurious lifestyle.

The trader will perpetuate this scheme by continually raising new capital from new or existing investors, and it will continue indefinitely until too many investors call for their principal at the same time. Eventually the trader will not have enough capital left in the account to pay back all the investors who requested principal. Oftentimes, these schemes will fall apart and be exposed during a recession because many investors seek to liquidate investments during these times.

Now, this type of investment scheme targets the wealthy due to multiple reasons. First of all, financial con artists are usually intelligent people. They understand that wealthy investors are looking for a 10% - 15% return per year. Thus, they don’t offer incredibly high rates of return. Unknowing investors see this as a sign of low-risk. Also, con artists know that wealthy people tell their friends about investments, and this is how the con artist primarily markets his services—through word of mouth. These types of ponzi schemes will also generally be in established circles of trust such as social, civic or church circles.

There are several steps wealthy investors should take in order to protect themselves against this type of investment scheme. First of all, it is a good rule of thumb to never conduct business with a financial firm, investment advisor, or broker that is not fully registered with proper regulatory authorities. This simple, single step can help weed out many potentially dangerous investment opportunities.

Also, the safest way to have a trader manage your funds may be to open a managed account. The best managed forex accounts are usually managed by Commodity Trading Advisors, which are fully registered with National Futures Association. In this type of investment, no cash ever changes hands. Instead you open a trading account, sign a power of attorney, and allow a trader to trade your account, but you still have complete access to it 24 hours per day, so that you can see all trading activity, any open positions, and profit/loss. In this scenario, only you are able to withdraw and deposit funds. This is a very transparent way to invest funds with a managed account trader.

No comments: