By: Jack WaymirecloseAuthor: Jack Waymire Name: Jack Waymire
Email: jack@paladinregistry.com
Site: http://paladinregistry.com
About: Jack writes for the InvestorWatchdog website and Worth magazine. He worked in the financial services industry from 1976 to 2004. For twenty of those years he was the president of a Registered Investment Advisory firm and a Broker/Dealer. Jack is the author of Who's Watching Your Money? The 17 Paladin Principles for Selecting a Financial Advisor and is a co-founder of PaladinRegistry.com.See Authors Posts (87) | July 30, 2009 | Illegal Schemes & Scams, Investor Information

Ponzi schemes and other investment scams share four common characteristics. Know the characteristics and you can avoid most schemes and scams. You can also warn friends, family, and associates so they can avoid them.

The Sales Pitch
Every scam has a sales pitch that tells investors what they want to hear. For example, "We have a unique investment process that enables us to produce high returns for low risk." Most victims of scams have reported return expectations of 40% or more with little or no exposure to risk.

This type risk/reward relationship DOES NOT exist. If you want higher returns, you have to accept increased risk. If you want lower risk, you have to accept lower returns. There are no "free lunches" when you invest your assets.

Custody of Assets
Bad guys have to gain possession of your assets so they can steal them. Therefore, they want you to write checks to them or companies they control. They have clever justifications for why you should give them control of your assets, but do not believe them.

The people operating the scam need control for another reason - performance reports have to match custodial reports. Accurate custodial reports would undermine their fake performance reports.

Never let a financial advisor come in direct contact with your assets. You must send your assets (checks, securities, other assets) to an independent, brand name custodian such as Charles Schwab, Fidelity, Pershing, or TD Ameritrade. Under NO conditions do you send assets to advisors or companies with names you do not recognize – watch out for acronyms.

The Referral Source
Early investors in many schemes and scams make money at the expense of later investors. They believe all of the victims of the scam are making money too so they  respond positively when scam operators ask for referrals to friends, family, and associate. This is a way for them to share their good fortune. 

It does not matter who refers you to an investment opportunity – your best friend, your brother, or your CPA. You still have to conduct your due diligence. Focus on ethics first by checking compliance records at FINRA.org, ADVs at SEC.gov, and talking your state’s securities commissioner. Once you are comfortable with their ethics focus on their sources of expertise: education, experience, certifications, and association memberships.

The Unusual Return
Another red flag is your performance compared to the securities markets and people you know. Watch out when the market is down and your friends are experiencing  negative returns, but you are receiving statement after statement showing positive returns.

You can revel in your good fortune or you can question the authenticity of the reports, especially if your source is the money manager who is responsible for producing the performance. When it is too good to be true, it usually is not true.