Do you suspect that your financial advisor may be scamming you? In this article we’ll look at the common ways that financial advisors commit misconduct so that you can take action.
Sadly, financial advisor fraud is a serious problem in the United States.
According to a study prepared for the FINRA Investor Education Foundation, 80 percent of American investors report that they have been solicited to participate in a fraud scheme, while 11 percent of American investors report that they personally lost money as a result of fraud.
FINRA’s Financial Fraud and Fraud Susceptibility in the United States report is also concerning for several other reasons. FINRA notes that the rate of investment fraud is most likely much higher than it is reported.
This is because many victims of financial advisor scams are too ashamed to come forward. Further, the study also found that a significant number of investors do not know how to spot common red flags of investment fraud.
At the Sonn Law Group, our legal team is committed to increasing investor education. We want all investors to know about the most common types of financial advisor scams so that they can protect themselves and their money.
In this article, we highlight six of the most financial advisor scams that all investors need to watch out for. If you have been the victim of any of these scams, or any other type of investment fraud, please contact our law firm today for immediate assistance.
Six Common Financial Advisor Scams
- Excessive Trading (Churning)
- Ponzi Schemes
- Material Misrepresentations
- Unsuitable Variable Annuities
- Outright Theft
FINANCIAL ADVISOR SCAM #1…
Excessive Trading (Churning)
Excessive trading (churning) occurs when a financial advisor makes trades on a customer’s account for the primary purpose of generating commission payments. The frequent buying and selling of securities is rarely in the best interests of an investor, especially a long-term investor. Financial advisors must have a valid reason for making every transaction.
In effect, churning simply transfers the investor’s money over to the financial advisor in the form of unnecessary fees. In the worst cases, churning can result in the victim losing a significant amount of money.
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FINANCIAL ADVISOR SCAM #2…
Named after 1920s era swindler Charles Ponzi, a Ponzi scheme is an investment fraud operation whereby a scammer transfers the money of new investors over to the original investors. While investors are promised high returns, in reality, the money is simply being shuffled around. Once the Ponzi scheme is unable to obtain a sufficient amount of new investment, the entire scam will soon come crashing down.
While some Ponzi schemes are relatively simple, many others are deeply complex. It is not always easy to spot a Ponzi scheme from the outside. Some of the most infamous examples of Ponzi schemes lasted for many years.
To carry out these scams, a financial advisor will typically get investors to buy by using a seemingly legitimate financial product or investment opportunity as ‘bait’. One common example of this is a real estate Ponzi scheme, which uses real property as a ‘hook’ to get innocent investors to buy into the scam.
Recent Broker / Advisor Investigations Involving Ponzi Scheme Allegations
- SEC Charges John J. Woods (Horizon Private Equity, III, LLC) of Running Decade-Long, $110M Ponzi Scheme (10/4/2021)
- Sonn Law Group Says Accused Ponzi Schemer Larry Ramos Mendoza Has Escaped House Arrest Pending Charges in Ponzi Scheme Case (9/3/2021)
- SEC Charges Robert J. Mueller of deeproot funds LLC with Operating $58M Ponzi Scheme (8/24/2021)
- Las Vegas-Based Profit Connection Wealth Services, Inc., Charged by SEC with Fraud (8/16/2021)
- MJ Capital Funding CEO Johanna M. Garcia Accused of Operating a Massive Ponzi Scheme by SEC (8/15/2021)
- How a Ponzi Scheme Lawyer Can Help Victims Recover Investment Losses (8/12/2021)
- Investigation: MR (Mark Ray) Cattle, Accused Ponzi Scheme (7/2/2021)
- Sonn Law Group to Represent Investor in Larry Ramos Ponzi Scheme (4/26/2021)
- EquiAlt LLC Investors File Class Action Lawsuit Over Alleged $170M Ponzi Scheme (2/28/2020)
- EquiAlt, LLC – Tampa Real Estate Firm – Charged by SEC with Defrauding Investors in Alleged $170M Ponzi Scheme (2/24/2020)
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FINANCIAL ADVISOR SCAM #3…
When a financial advisor presents a financial product or investment opportunity to a customer, they have a legal duty to make accurate representations. When a financial advisor makes material misrepresentations or omits material information, they may be guilty of fraud. Misrepresentations come in a wide variety of different forms. Though, often, a financial advisor’s scam will involve the following two things:
- False promises of above-market returns; and
- False promises of low risk.
Using these false representations, a financial advisor may try to convince an innocent investor to put their hard-earned money into a scam. Investors who lost money because of the misrepresentations of a financial advisor have a legal right to bring a claim for compensation.
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FINANCIAL ADVISOR SCAM #4...
Unsuitable Variable Annuities
Under securities industry regulations (FINRA Rule 2111), financial advisors have a professional obligation to only recommend suitable investments to their customers. Unfortunately, some financial advisors carry out fraud through making unsuitable investment recommendations.
Investors need to be careful when putting money into variable annuities, as this financial product is sometimes used in these types of schemes. The reason for that is that variable annuities often come with high commissions for the financial advisor. A financial advisor may be more focused on their commission payments than they are on the best financial interests of their customers. In the worst cases, a financial advisor will commit fraud by buying and selling multiple variable annuities in a client’s account, thereby making them pay early surrender charges on top of high commission payments.
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FINANCIAL ADVISOR SCAM #5...
Sadly, forgeries are a serious problem in the financial services industry. Some financial advisors carry out their scam by forging customer documents. Forgeries come in many different forms. In some cases, financial advisors may forge a client’s signature on a check.
In other cases, financial advisors may carry out their fraud scheme by forging a client’s signature on trading authorization forms. If you find that your financial advisor has forged your name or your loved one’s name on any documents, it is imperative that you consult with an experienced investment fraud attorney as soon as possible.
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FINANCIAL ADVISOR SCAM #6...
Finally, there are also cases in which financial advisors will simply steal from their clients. While any investor can potentially be a victim of theft, senior citizen investors often become targets of unscrupulous financial advisors.
If you are caring for an elderly loved one, and they are no longer capable of review complex brokerage account statements, it is a best practice to make sure that their money is being properly cared for by their financial advisor. To be clear, theft is prohibited by securities industry rules (FINRA Rule 2150), and it may also be a criminal act.
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Speak to a Financial Advisor Fraud Attorney at Sonn Law Group Today
At Sonn Law Group, we have extensive experience handling financial advisor fraud claims. If you were the victim of a financial advisor scam, you need to take immediate action to protect your rights.
For a free, no obligation review of your investment fraud case, please contact us today. Our law firm handles all financial advisor fraud claims on a contingency basis. Our attorneys only get paid if we help you recover financial compensation.