Consumer Advisory: Be wary of investment advice shared by friends and family

DORA’s Division of Securities warns against the dangers of “affinity fraud” during the holidays.
Among victims of fraud, 70 percent had relied on financial advice from friends or family.  

DENVER (Dec. 16, 2016) — Many subjects are too taboo to discuss during the holidays. One topic that should be cautioned from discussing around the holiday dinner table is investing your money. Yet, many Americans don’t see an issue with getting investment tips and advice from loved ones and acquaintances. In fact, a recent survey conducted by the Financial Industry Regulatory Authority (FINRA) Foundation found that over a third of investors make investment decisions solely based on conversations with family and friends. Which makes this time of year ripe for affinity fraud.
 
While many people have an outspoken relative who will inevitably bring up an uncomfortable topic, consider also the cousin, or perhaps even a cousin’s new boyfriend, who will bend your ear about a “can’t miss” opportunity in the finance world. In the regulatory industry, we often caution people against what we call “affinity fraud.” The U.S. Securities and Exchange Commission defines affinity fraud as “investment scams that prey upon members of identifiable groups.” The FINRA Foundation survey also found that among victims of fraud, a whopping 70 percent had relied on financial advice from friends or family.
 
Families or groups of friends fall into this “affinity” category, and even if the person who is expounding upon the merits of investing in a “get rich quick” deal with high returns and zero risk isn’t the scammer, he/she very well could be propagating a scheme in which he/she is being victimized as well.
 
If you think it can’t happen to you, think again. Just last year, a Jefferson County adviser pleaded guilty to securities fraud after he had been investigated by the Division of Securities for running a Ponzi scheme. A Ponzi scheme takes place when early investors are paid supposed returns with the money from new investors instead of with legitimate profits. This adviser had relied heavily upon the affinity within a men’s prayer group to promote the fraudulent investments. After word of his supposedly lucrative deals circulated among the friends in the group, many of the members ended up losing a lot of money through the scheme.
 
This is not to say that one should never consult knowledgeable acquaintances to get well-respected advice. But don’t make it the only thing on which you rely. Seventy percent of the fraud victims surveyed also admitted that they didn’t follow up social investment conversations by checking the license of a recommended professional, and 65 percent conceded that they never confirmed that a financial product was properly registered with regulators.
 
It only takes five minutes to supplement one of these conversations with a visit to askDORA.colorado.gov, where you can find instructions on how to research the license and background of a professional, or the validity of an offering. This small step can often be enough to alert you to a bad deal.

So remember, if your sweet auntie asks about your personal life, it’s ok to humor her. And if your outspoken uncle starts talking about world events, you can gently decline to give your opinion. And if your well-meaning cousin asks you to invest in an amazing new enterprise that brought him 16 percent returns, perhaps it’s just best to excuse yourself from the table!
 
Take 5 to Get Wise by checking out all of DORA's helpful holiday-related consumer advisories. Visit askDORA.colorado.gov.
 
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About DORA
The Department of Regulatory Agencies (DORA) is dedicated to preserving the integrity of the marketplace and is committed to promoting a fair and competitive business environment in Colorado. Consumer protection is our mission. Visit www.dora.colorado.gov for more information or call 303-894-7855 / toll free 1-800-886-7675