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During these financially destabilizing times, you may have reached out to a financial advisor for help navigating this difficult economy. Seeking a financial expert’s advice is one of the most common methods people use to protect themselves from financial scams. However, what happens when the person you are turning to for advice is an unscrupulous figure who is engaging in fraudulent behavior? It is important to understand how fraud works in the financial services industry so that you can take steps to protect yourself.

What Is a Financial Advisor Scam?

Financial advisor scams occur when a person you trust as your fiduciary gives you self-serving financial advice that may not be appropriate for you and is more interested in helping the advisor than you. A study by the FINRA Investor Education Foundation found that 80% of American investors had been solicited to participate in a fraud scheme and 11% of American investors reported they had lost money to a fraud scheme. However, researchers note that victims of financial advisor scams are often too embarrassed to come forward, so these numbers may be underreported.

The COVID-19 Effect

The COVID-19 pandemic has had an adverse effect on financial services as uncertainty sweeps the world. Financial scams and identity theft are at all time highs. Working from home has risen to additional security vulnerabilities and data breaches. Additionally, a lack of information and fear is leading the actions of investors, who may fall prey to financial scammers.

Types of Financial Advisor Scams

There are a variety of financial advisor scams, including:


Churning, or excessive trading, occurs when your financial advisor makes trades for the primary purpose of receiving commissions. While your financial advisor may have good reason to sell off or trade certain investments, churning puts your advisor’s interests ahead of your own. Excessive churning can result in unnecessary fees and sub-optimal returns on your investments.

Ponzi Scheme

Another common type of financial investor scam is a Ponzi scheme in which a financial advisor takes money from new investors to pay off old investors. In this scheme, there is generally no profit, the funds are just being shuffled around. These schemes often fail once there is insufficient amounts of new money coming in to pay off old investors.

Material Misrepresentations

Financial advisors are required to provide accurate representations about any proposed investments for their clients. When they omit material information or make material misrepresentations about the investment, this may rise to the level of financial fraud. This type of fraud usually involves making false promises of above-market returns or of low risk. False representations can also take the form of lying about the advisor’s own credentials.

Variable Annuities

While variable annuities can sometimes be an appropriate investment for financial services clients, financial advisors may commit fraud when they make unsuitable investment recommendations. Variable annuities are a common vehicle for this type of fraud because financial advisors often receive high commissions for recommending this type of product, which may encourage a financial advisor to recommend this product when it is not suitable for their client’s needs.

Affinity Fraud

Affinity fraud is a type of fraud that targets like members of a community, such as groups of people who are of the same cultural background, religion, or geographic location. New investors buy in because they are a member of the same group of current investors.


In the most unscrupulous of cases, financial advisors outright steal from their clients. They may take advantage of vulnerable clients or of their relationship of trust to get clients to sign over assets to them or make risky investments.

What Are the Consequences of Financial Scams?

Financial scams can result in a number of serious consequences, including:

  • The payment of unnecessary fees, commissions, surrender charges, and service charges
  • Significant losses of money
  • Identity theft
  • Lost time and not being able to make up lost retirement funds

How to Detect Scams and Avoid Them

One of the best ways to protect yourself from financial fraud is to remember that if it’s too good to be true, it probably is. Risk and returns are often correlated in investments: If you expect a high rate of return, there will probably be a high degree of risk. Therefore, if your financial advisor promises you a high rate of return with little risk, there is probably a catch. Historically, the U.S. stock market has provided an average return of 9.5%. If your investment advisor is offering a return in excess of 12%, it may be a scam.

Also, if your investment advisor is recommending making constant trades, this may simply be a ploy for them to get more in commissions. Another warning sign of a potential scam is a sense of urgency. If your investor says you need to act now and cannot think about it, avoid it.

How to Protect Yourself from Financial Scams and Identity Theft

There are many steps that you can take to protect yourself from financial scams and in different types of identity theft, including:

1.     Verify the Financial Advisor’s Background

Thoroughly vet your financial advisor before doing any business with him or her. Check if they are licensed and a fiduciary. Also, ask for professional references from long-term clients and call them. Check if the advisor has ever been the subject of disciplinary action by looking them up at these websites:

2.     Ask How Your Advisor Is Compensated

Ask prospective advisors about how they are compensated so that you can understand if their recommendations will be influenced on how they are paid. Ask for a written statement regarding their services, fee structure, and investment strategies.

3.     Enroll in Credit and Identity Monitoring

Credit monitoring and identity theft protection can alert you to a potential problem, such as identity theft. Having a professional company monitor your personal information can help you respond to threats more quickly before damage is done.

4.     Ask About Each Investment

When your financial advisor recommends a particular investment, be sure that you understand the advice, pros, and cons. Be sure you have a clear understanding about the investment. If it sounds too complicated, avoid the transaction.

5.     Do Not Give Away More Power Than Necessary

You do not have to give away a power of attorney or sign over ownership of an asset for a financial advisor to be involved.

6.  Take Home Messages

Financial advisors can provide expertise related to complex investments. However, they can also take advantage of their position of trust. Use the steps above to protect yourself and do not be afraid to walk away from any recommendation that does not feel right to you.


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Jonah Hill calls out British daily for ‘stalking’ him while surfing, sharing shirtless photo of him

Hill added, "So the idea that the media tries to play me by stalking me while surfing...

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