Americans are losing as much as $40 billion a year to investment fraud. In the recent past, 30.2 million—13.5 percent of consumers—fell victim to fraud in one year.
Investment fraud occurs when people are persuaded to invest in fraudulent stocks or bonds and consequently lose their money.
The elderly especially are targeted for investment fraud for several reasons. First, perhaps because some are not as financially literate as they think. In one financial literacy research project, participants were asked the following question: suppose you owe $1,000 on your credit card and the interest rate you are charged is 20 percent per year, compounded annually. If you didn’t pay anything off, at this interest rate, how many years would it take for the amount to double?
Only 35.9 percent of participants answered correctly—Under 5 years.
The participants were categorized into different demographics, including age. The results were interesting: of the participants 65 and older, less than 30 percent answered the question correctly. While on average these same individuals claim financial literacy, the results suggest the opposite.
A second reason is that the elderly often have substantial wealth. According to 2010 census data, the net worth of the average household headed by a person 65 or older is 47 times greater than one headed by an individual under 35. The median net worth of these households is $170,494. Many elderly people who have money can be persuaded to invest —even into holdings that are risky.
On the other hand, some people 65 or older who are ready to retire, or already retired, are realizing that they do not have the money needed to do so as comfortably as they would like. Bonds that they thought would make 3 to 5 percent return now pay less than one percent. Since investment fraud usually offers the promise of high returns, it can be easy to fall into the trap of trying to make money fast.
Another reason that the elderly are targeted for investment fraud is that they appear more likely to take calls from fraudulent telemarketers. According to an AARP study, an estimated 57 percent of telemarketing fraud victims are over the age of 50. Part of the reason many of the elderly are sucked into investment scams is that they are willing to take calls from fraudsters. A sad fact of our society is that millions of older people are lonely and are willing to take calls from those who will take their money.
Investment fraud scam artists know how to lure even educated people into bad investments. They especially know how to target the elderly; they are aware of the elderly’s need for higher returns and will exploit them. But there are ways to avoid being scammed.
The U.S. Securities and Exchange Commission offers some suggestions. First, ask questions and check the answers. Research the company before investing. Never judge a person’s integrity based on how he or she sounds. This is especially important with telemarketers. Do not be rushed into investment decisions—take your time. Finally, watch out for salespeople who prey on your fears.
Investment fraud is a serious problem and the fraudsters who do it know their trade. It is important to be wary of them and cautious when making investments.
Another thing that many of us can do is to be aware of the needs of old people. We don’t need to treat old people as if they always need our company. But, a phone call or a visit to an older individual might not be a bad investment for a number of us. We might even find that we learn a thing or two from the experience.
TO LEARN MORE about how to avoid fraud and common scams, learn new tips, and sign up to receive alerts about recent scams, visit the AARP’s ElderWatch program at their website by clicking here: ACT NOW
TO DO MORE to prepare yourself to be able to identify and avoid scams and fraud, try these interactive tools developed by FINRA Investor Education Foundation and D2D Fund by clicking here: ACT NOW
Written by Maren McInnes