Thursday, September 12, 2013

FINRA Study: Financial Scams Prevalent

By Tim Dulaney, PhD, FRM and Tim Husson, PhD

Financial fraud is estimated to cost Americans between $40 and $50 billion annually (PDF).  Last fall, the Financial Industry Regulatory Authority (FINRA) commissioned a study on the financial vulnerability of Americans to classic investor scams.  The online study surveyed a sample of more than 2,000 Americans aged 40 and above, chosen to represent the approximate age, ethnicity, and census region distribution reflected by the 2010 census.1

According to the report (PDF), the survey found that approximately 84% of respondents have been targeted by scammers and that approximately 11% have lost most as a result of investing in a scam.  Investors over age 65 were the most likely to be solicited (93%) and the most likely to have lost money on a scam (16%).

Those in the highest household income category were most likely to have invested in a potentially fraudulent investment (49%) and, perhaps counterintuitively, the likelihood of losing money in a scam actually increased with more education -- 54% of those with post-graduate education versus 29% of those with only high school diplomas.

The survey also studied a subsample of "self-reported victims" of investment fraud.  By far the most likely way the fraudster was introduced to the victim was through a mutual friend (34%).  Many victims did not report the fraud because they were unsure where to report it.

These results suggest we have a long way to go in preventing financial fraud.  Prior to putting money into any unsolicited investment, we suggest running it through the FINRA Scam Meter as well as speaking with an independent financial advisor (or two).  You can also follow FINRA and SEC investor alerts about particular investments or scams, and it may also be useful to follow recent SEC actions and investigations to see what kind of scams are out there.

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1For a similar study of Canadians, see the National Investment Fraud Vulnerability Report (PDF).

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