1. Greed: Most people don’t consider it “greedy” to want better returns, but there’s a fine line between stretching for a better return and crossing the line blindly thinking you can dominate the market, strike it rich, or hit the jackpot.
The NASAA warning about Ponzi schemes — and its alert over oil and gas investments and promissory notes — is a direct response to greed.
There have been Ponzi schemes where the primary selling point was consistency —that was Bernie Madoff’s big appeal. But the most common of these crooked programs involves promising big returns, bringing in big dollars, and paying the early investors with the proceeds of the lemmings who follow along, with the last ones in being the first to suffer when the whole thing implodes.
In the oil/gas frauds — as opposed to legitimate energy stocks — the appeal typically targets the size of the potential return, the ability to bring home a gusher of money. With promissory notes, it’s simply a significantly bigger return than the traditional fixed-income market can deliver.
It’s okay to want more and better, but not at the expense of due diligence that keeps desire in check.
2. Fear: The yin to greed’s yang, the other side of the coin but every bit as dangerous, fear is an emotion played upon by those unlicensed salesmen hawking unregistered securities.
It’s also used to pitch a lot of mainstream products such as equity-indexed annuities and other twists that are supposed to insulate the investor from losses, but where the buyer may not completely understand the cost of that kind of protection.
As with greed, there is a fine line separating normal worry from panicky emotions, and there is an equally fine distinction between an investment product that offers downside protection or a strategy that is designed to insulate you from losses and an over-priced, unnecessary, make-the-adviser wealthy product or an outright rip-off.
3. Sloth: Call it convenience if you are an optimist or laziness if you’re a pessimistic judge of human nature, but investors could save themselves from a lot of trouble if they simply did the basics in due diligence.
Looking into the background of an adviser, broker or salesman will quickly show who lacks a license or has a history of trouble with clients. Likewise, a quick contact with a state securities administrator would save a lot of consumers from those unregistered products.
Likewise, many investors buy bad mutual funds, invest in complicated insurance products and more by simply not doing the research. basic online comparisons seeking independent analysis, lower-cost alternatives and more.
There is no substitute for being a savvy consumer and aggressively checking things out before acting.
4. Assumption: This goes hand-in-hand with sloth or laziness and can, in fact, compound the problem.
When rip-offs and scams are exposed and uncovered by regulators, it’s not uncommon to find out that the crime affected entire families, church communities, and other affinity groups.
The disease of these frauds spreads largely because each new consumer attracted to the pitch assumed that “If this works for my [father, family member, friend, minister, barber, etc.], that’s good enough for me.”
If the other person can’t show you their due diligence, their endorsement of an adviser or investment is insufficient; you can’t simply accept that other investors — no matter how much you like them or know them — have done their homework, because most don’t.
Assumption is the basis for a lot of mistakes. Don’t assume anything, unless you are willing to pay the price for it later.
5. Blind trust: Consumers can make decisions about their money, but often believe they can’t. They turn for help and feel like they have been extended a lifeline when an adviser gives them counsel, particularly when it opens them to a world beyond basic mutual funds.
They don’t believe the adviser they trust would bury bad news in fine print, so they don’t go searching for the devils lurking in those details.
That’s how investors wind up with the real-estate investments NASAA warned about, accepting non-traded REITs without asking questions about liquidity and suitability.
Investors who are too trusting too quickly are in danger of falling victim not only to the threats NASAA warns about, but also to inappropriate and dumb ideas. You need not be scammed to suffer lousy investment results.
Investors would avoid a lot of financial threats and dangers if they would just remember that trust is not given, but earned.