The Fraud Examiner
Investment Fraud and the Role of Trust
By Susan Mangiero, Ph.D., CFE, CFA, AIFA
Managing Director, Fiduciary Leadership, LLC
Investment fraud can happen to anyone, and unfortunately, there is no shortage of investment fraud possibilities. Affinity fraud, pyramid schemes, pump-and-dump security trading, high-return or risk-free investments, and pre-IPO scams are only a few of a long list of schemes that could separate
investors from their hard-earned money.
Investors can find themselves the victims of fraud when they don’t do enough due diligence or put too much faith in the people selling or managing a fund. Investors around the world would be wise to grasp fundamentals of the financial services industry so they can ask questions
during sales pitches and be able to better vet product literature and contracts. Companies also need to better communicate risks in a user-friendly manner. A
2016 survey conducted by the National Association of Retirement Plan Participantsshows that only one in 10 persons interviewed has confidence in financial institutions. Financial advisors are similarly viewed by some investors with skepticism. This is problematic.
Making matters worse, the trust issue is related to two ongoing trends — a low savings rate for retirement and a shift towards riskier assets in hopes of high returns. Taking more risks isn’t necessarily bad as long as investors sufficiently understand what is being offered to them and have
assurances that sufficient safeguards are in place. Investors want information about risk they feel they can trust. As far as those planning for their future, investors need help but may be reluctant to approach financial professionals they are not sure they can trust.
To a great degree, investment fraud isn’t just a problem for investors. When it occurs, it can taint the financial services industry overall and its high-integrity professionals. This could dampen sales and profitability. Low trust of an entire industry can invite additional and costly
regulation. The net effect can be unfair penalties that diligent investment stewards must pay for the trespasses of fraudsters.
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