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How to Spot and Avoid Financial Scams

“There are some frauds that are so well conducted, that it would be stupidity not to be deceived by them.”

— Charles Caleb Colton

Recently, some investors I know were caught up in a deal shut down by the SEC.

They determined the deal may be a scam or a Ponzi scheme.

Warren Buffett himself was almost conned out of a billion dollars with a clean energy scam.

If a guy as smart as Warren Buffett can fall for scams, anyone can!

They’re very common.

In 2020 alone, the SEC had over 700 enforcement actions related to securities fraud.

That’s why it’s so important to educate yourself.

You need to learn how to avoid these financial scams.

Let’s jump into it!

1. Understand Common Types of Financial Scams

There are many common types of financial scams.

One I’m sure we’re all familiar with is the Nigerian Prince scam:

A Nigerian Prince has $30 million and needs your bank account information to hide the money from corrupt officials.

Another common scam is people calling you claiming to be the IRS.

Whether it’s phone scams or mail scams, there are a lot of things to look out for.

As an investor, there are very specific investor-related scams to be aware of.

Ponzitracker, a website that follows Ponzi schemes, found that there were 56 known Ponzi schemes in 2022 that involved in over $5.3 billion of investor money.

Ouch!

That’s a lot of money.

Ponzi schemes have a long history of tricking people out of their hard-earned money.

Charles Ponzi is the namesake of the scheme.

He popularized a scheme that people had named “robbing Peter to pay Paul.”

The money coming in from investors goees out to pay other investors.

One thing to keep in mind when encountering these common schemes is Warren Buffett’s famous investing advice: 

“Rule number one is don’t lose money. Rule number two is don’t forget about rule number one.”

2. Learn Warning Signs of Financial Scams

Let’s go over some warning signs of financial scams, particularly Ponzi schemes.

The first sign is high returns.

Charles Ponzi offered a 50% return in 90 days.

That’s huge!

It’s no wonder so many people were caught up in the scheme.

Groups involved in financial scams will typically pressure you to invest.

They’re very cagey about giving information.

They’ll also have requests for personal financial information.

Those are all major red flags.

They use this black box investment idea where they have information they can’t share for some reason.

Where are the bank statements showing income?

Where are the contracts?

These scammers approach their business practices in a very cagey way.

They’ll use phrases like “You’re lucky to be investing in this kind of deal.”

Sometimes they’ll show a false sense of scarcity, saying the investment is very exclusive.

Remember these traits if you think you may be dealing with a financial scam:

1) High pressure returns
2) Returns are too good to be true
3) Very cagey about information

3. Take Steps to Protect Yourself

If you want to protect yourself, you need to remember due diligence.

What kind of diligence are you doing when you seek out deals?

Do you understand the strategy?

Do you perform background checks on the sponsors?

If you can’t do a background check, you can Google the company yourself and see if anything shady comes up.

I’ve done background checks on the partners I’m working with.

I know people who do this for passive investors as well.

You should also ask if there is a third party validating the company.

More specifically: Is there a well-known third party validating them?

I saw a book once about a scam in California involving liquor licenses.

A sham company tricked people into thinking they were getting loans for their businesses.

Instead, the whole thing was a classic Ponzi scheme with the money used to pay back investors.

So sometimes well known third-party endorsement can actually be deceiving.

If you can, always check things over yourself.

Ask for the relevant financial information or fly out to see the investment.

Sign an NDA if needed.

Watch out for promises of high returns that seem too good to be true.

If you have friends or family who are interested in cagey investments, talk to them about it.

Encourage them to do more diligence.

The biggest thing when it comes to investing is trusting your gut.

Eckhart Tolle, who wrote The Power of Now, talks about this.

He says that when we get information, our brain will say everything’s okay, but our gut will say something is wrong.

It’s really important to pay attention to that.

I can’t tell you how many times I’ve talked to someone who didn’t listen to their gut about an investment.

In a lot of those instances, that investment ended up being a scam.

Listen to your own gut, but also listen to your spouse or friends.

An outside opinion can never be undervalued.

Now I want to hear from you!

Do you have any tips on how to detect financial scams?


Let us know in the comments.

Before you leave, make sure to check out our special report about inflation investing. It shares the best choices to invest during an inflationary environment.

If you are interested in investing with us, we are happy to answer any questions that you may have. Join our investment club today and we will be in touch.

Disclaimer: I am not your investment advisor. This is for educational purposes only. I am not giving specific advice on what you can do. I am simply giving my opinions.

Bronson Hill

Bronson used to work as a consultant for a medical device company but switched to investing in apartment buildings to make his money work for him. He started with a single rental property that made good money and, after some advice from a family member, moved into bigger real estate projects. Now, he's all about helping others get into this kind of investment to earn money without having to work all the time. When he's not dealing with investments, Bronson loves to travel, write songs, stay active, and help fight modern slavery through his work with Dressember. He believes in working smarter, not harder, and wants to share how that's possible with everyone.

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