How to Protect Your Retirement Investments from Scams

The Great Recession hammered investments across the board. But perhaps no one was more devastated by the economic downturn than retirees or those on the verge of retirement.

People who already retired were no longer working, so they had no chance to earn back the money lost. People close to retirement were left scrambling to regain losses quickly or delay retirement altogether.

[In Pictures: The Best Places to Retire in 2012.]

It's no coincidence that around this time, a new kind of scam emerged that targeted financially stressed retirees. These scams take many forms, but perhaps the most common is what is known as a "free lunch" scam. Here's how it works: An advertisement is placed in a newspaper or online promising a high-reward, low-risk investment that directly benefits retirees. It also promises a free lunch at a local restaurant, where a more expansive sales pitch can be made.

At the lunch, a polished broker promises market-beating returns. All the retiree has to do is roll over his or her 401(k) account into an account run by the broker's firm. There's some talk about risk and fees but with high returns, those fees would be nominal. Desperate to make up the money lost in the bear market, the retiree agrees.

Once that money is under the broker's control, it disappears. The retirees are told that unforeseen market fluctuations caused steep losses in their account. According to the broker, there's little to nothing left. The retirees are left broke; the broker most likely walks off with the money.

These scams have become so common that the American Association of Retired People (AARP) started a No Free Lunch campaign to increase awareness.

[See 10 Ways to Avoid Online Scams.]

"We have people who are concerned about lack of credentials, high-pressured pitches, promises of high returns, and virtually no risk," says Sally Hurme, a lawyer and project manager with AARP education and outreach. "We want them to report their concerns back to us in an easy reporting form available at this site."

Wide range of scams. Free lunch scams are hardly the only ones that target seniors. In "mystery shopper" scams, people receive a large check from what appears to be a government agency with instructions to deposit the check into a checking account. There are also instructions to spend a portion of the money at a particular store, keep a bit in the account, and wire the rest overseas.

Sounds like easy money. But the check is bogus and the money being transferred out of the account belongs to the victim.

Then there's medical fraud, in which seniors are targeted for unneeded tests, and a relative-in-distress fraud, in which a person calls claiming to be a long-lost relative in need of money. There are also Ponzi schemes, made famous by Bernie Madoff. Money raised from new investors is used to pay old investors. Sooner or later, the scheme collapses and everyone loses their cash. Other fraudsters sell unregistered securities, like promissory notes or sales in microstocks.

According to Katherine Hutt, director of communications at the Council of Better Business Bureaus, these are just a sampling of the scams aimed at seniors. "During retirement specifically, there are so many different scams that targets seniors," she says. "There are a lot of scam artists that fly under the radar."

[See 4 Ways to Avoid Financial Scams.]

Fraud warning signs. Gerri Walsh, vice president of investor education at the Financial Industry Regulatory Authority (FINRA), says a scammer's primary way of targeting a victim is through persuasion. To gain trust through persuasion, he or she uses five primary methods:

Promises of phantom riches. "They dangle something that you want but can't have--guaranteed returns and promises of untold riches," Walsh says.

Source credibility. "This is the idea that we all want to work with the person who is the expert. We seek out the person who is knowledgeable," according to Walsh. "A con man looks the part of the authoritative figure, but authority can be faked. Diplomas you claim to have, accolades you have gained--it can all be made up."

Social consensus. "Everybody is doing it, and you don't want to be the one that's left off the bus. You want to be with the 'in' crowd," she says.

Reciprocity. "The idea behind this is the concept of 'I do something nice for you, you do something nice for me,'" Walsh says. "There's been a lot of research that's been done that shows when you give someone something, that person is more likely to give back to you."

Scarcity. "It's used to create a false sense of urgency--something is time-limited. They might say it's quantity-limited. They also might claim something is exclusive," Walsh says. "This is the idea that this opportunity is only available to a select group of investors, and you are one of them."

According to Walsh, the best scammers will use these tactics on a mark without the mark realizing that he or she is being targeted.

How to fight back. Walsh says the best weapon against cons is simple: Ask a lot of questions.

"The process is designed to weigh you down so that you're in an ether and not making a rational decision--you're making an emotional one," she says. "The best way to avoid this situation is to ask questions. If you make the con's work difficult, they'll back away."

"You've got to do your own independent research," adds AARP's Hurme. "You have to verify the info and not let the glitter and glamour of a brochure that is not a regular prospectus get in the way of prudent caution."

Twitter: @davidcfrancis



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