Here’s some sage advice you probably learned as a tyke: There’s no such thing as a free lunch.
That’s usually true. But when it comes to the free lunches, weekends or other giveaways in exchange for listening to an investment pitch, you can land a freebie without getting roped into a hasty investment. Here are five rules for scoring free stuff without spending money unwisely on investor scams.
Know the score
“Anyone putting on a free promotion isn’t there to provide free food or lodging — they’re out to sell you something,” says Steven J.J. Weisman, author of “The Truth About Avoiding Scams.”
“There’s nothing illegal in that. But recognize they’re there to sell you a legitimate product, a phony product, or a legitimate product that may not be right for you. Those are the three possible outcomes, and you must be wary of two of them.”
Be alert for dubious promises
“Salespeople often talk about ‘guarantees’ and ‘no market risk,’ but that’s because they’re almost always selling an insurance-based product like an annuity contract,” says H. Jude Boudreaux, a Certified Financial Planner and founder of Upperline Financial Planning in New Orleans. “Like any other financial product, an annuity has its place. But salespeople try to make it fit every client’s situation.”
Even so, there often are trade-offs for guarantees and no-risk products.
Annuities are life insurance contracts sold by insurance companies, brokers and other financial institutions that provide a regular periodic payment to a policyholder for a specified period of time. But you often can’t walk away from annuities without hefty surrender charges, Boudreaux says.
To avoid investor scams, Weisman says to read the fine print before giving a deposit or signing anything. “Seminars and other presentations aren’t geared toward giving you a precise, detailed explanation of anything,” says Weisman. “You have to look at the fine print. Usually, the smaller the print, the more troublesome the provisions. That’s where you find disclaimers and additional, often excessive, fees.”
Avoid pressure to ‘act now!’
It’s important to remember that you don’t have to act instantly. “Anyone who scares you into acting immediately is likely a scammer or someone pushing a product that, although legal, isn’t a good match for everyone,” says Weisman. “When a salesperson tries to make a quick close with a limited-time offer, that person is really saying you won’t have time to check on the person selling the product, the entity sponsoring it or the investment itself.”
Resist signing on the spot. “The easiest delay tactic is to defer to a third party,” says Alex R. Foster, a registered investment adviser at AF Capital Management LLC in Atlanta. “Say, ‘Let me talk to my husband (or wife, accountant, parents) before I sign.'”
Assume the worst
You have to fight human nature to say ‘no’ to any investment, says Pat Huddleston, former Securities and Exchange Commission enforcement chief in Atlanta and chief executive officer of Investor’s Watchdog LLC.
“We all suffer from congruence bias, which leads us to be tied to our first theory. Upon listening to a charismatic salesperson, you may think you’re going to do your due diligence. But because of congruence bias, most people try to confirm legitimacy,” Huddleston says. “To avoid fraud, assume a person is a fraud, and set out to prove it. If you can’t, you can be reasonably certain it’s a legitimate attempt to make money like the salesperson says.”
Investigate like crazy
To ferret out investor scams, Foster suggests starting by checking out the salesperson and firm on the SEC website.
Next, says Huddleston, search Pacer.gov, a fee-based database that provides access to federal, civil, criminal and bankruptcy court records. “Search not only individuals’ names but any businesses they’ve been associated with,” he says. “You can find those by looking at your secretary of state’s website, which will tell you if a person has formed or was involved in other businesses. See if there are lawsuits claiming fraud, unhappy customers or bankruptcy filings.”
Few states have websites like Pacer, but Huddleston says for less than $50 you can hire a courthouse docket search company to rummage through state records. Also invest the $10 or less necessary to check the National Student Clearinghouse website to verify academic credentials. “It’s not at all unusual for people to inflate their resume, because credentials are important,” Huddleston says. “With just a name, school and birth date, you can see if people have the degree they claim.”
How can you get that information? Ask casual but smart questions during the presentation. “Look for things you can test,” Huddleston says. Ask about the presenter’s degree, work history, hometown and how long he or she lived there.
“Chitchat can tell you an awful lot,” he says.