FINRA's Online "Risk Meter" and "Scam Meter" Tools Are Worthwhile

By James Eccleston

INRA (the Financial Industry Regulatory Authority) has a response to what seems to be almost daily revelations of investment fraud and investment scams around the globe. The response is a set of online tools aptly named the "Risk Meter" and the "Scam Meter." I've tested the tools and recommend them to investors. The tools are complemented by a FINRA Investor Alert entitled, "Avoiding Investment Scams." Let's examine the online tools and the investor alert.

First, let's examine the online tools. Each one asks a series of questions. The Risk Meter asks questions to determine: does the investor lives alone; has the investor checked with the regulators to determine if the investment adviser and the investment product recommended are registered with state and federal regulators; has the investor been told "too good to be true" type statements about the investment; has the investor attended an investment seminar with a free meal; has the investor focused on high yield investments; and has the investor recently experienced a negative life event. Based on the answers to the series of questions, the investor is given a "score" on the risk meter. The investor also is given particular warnings triggered by answers to the questions.

For example, when I hypothetically answered "yes" to the question of whether or not I focus on high yield investments, FINRA provided the following caution:

Victims of investment fraud are twice as likely to prefer high-risk investments with higher-than-average returns to safe investments with average returns. Chasing high yields can get investors into hot water, especially if they don't stop to ask about risk. All investments carry risk-and the higher the likely return, the greater the risk you take.

Likewise, when I hypothetically answered "yes" to the question of whether or not I had experienced a recent negative life event, FINRA provided the following caution:

Older investors who fit the profile of investment fraud victims are more than 30% likely than non-victims to have experienced a recent health or financial setback.

The second of the two online tools, the "Scam Meter", is similar. The Scam Meter asks questions to determine: what kind of investment has been offered; how did the investor learn of the investment; what has the investor been told about the investment; and who is selling the investment. Again, based on the answers to the series of questions, the investor is given a "score" on the Scam Meter. As with the Risk Meter, the investor also is given particular warnings triggered by answers to the questions.

For example, when I hypothetically answered that I was not sure what the investment is, FINRA provided the following caution:

Smart investing for the individual investor is not rocket science. High complexity does not equate to high return as much as it does to high risk and high fees. If you can't understand what you are thinking of buying, you have no business buying it. The best investments for most investors are straight forward products that are registered with securities regulators, like mutual funds, stocks and bonds.

Likewise, when I hypothetically answered that the investment adviser told me that the investment already had been purchased by many other successful investors, FINRA provided the following caution:

This is a form of persuasion called "social consensus." It works well because we often rely on what other people are doing when deciding what we want to do, and because we are social beings and have a strong need to belong to successful groups. Frequently this statement is made to make you think that everyone else thinks the investment is a good deal, even though no one may be profiting except the fraudster.

FINRA's Investor Alert on avoiding investment scams equally is worthwhile. FINRA discusses: the types of investment scams; the psychology of a scam; "Red Flags" of fraud; who gets victimized; and how investors can protect themselves. For example, types of investment scams discussed are pyramid schemes, Ponzi schemes, pump and dump, advance fee fraud, and offshore scams. Perhaps less well-known than the others is the advance fee fraud. This occurs when an investor hopes to reverse a previous mistake in purchasing a low-priced stock. According to FINRA, the scam generally begins with an offer to pay the investor "an enticingly high price for worthless stock." However, to take advantage of this generous offer, the investor must first send in a fee for the service. The investor who sends the fee not only loses that fee but never again hears of the offer.

FINRA's discussion of the Red Flags of fraud also is helpful. In a nutshell, the warning signs fall into the following categories: performance guarantees; unregistered investment products; overly consistent returns (just like Bernard Madoff purportedly generated); complex strategies; missing documentation (no prospectus or offering circular, for instance); account discrepancies (such as unauthorized trades and missing funds); and a "pushy salesperson" who requires the investor to "act now."

FINRA's online tools - though a tad gimmicky - coupled with the Investor Alert may help save some investors from the next (daily?) revelation of an investment fraud. Let's hope so!

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About the Author: James J. Eccleston leads the Securities group at the Chicago law firm of Shaheen, Novoselsky, Staat, Filipowski & Eccleston, P.C., where he represents investors in recovering investment losses and financial services professionals in disciplinary, employment, and compliance matters. He has held numerous securities licenses and Chicago Bar Association leadership positions and serves as an arbitrator and mediator. He is a recipient of Martindale-Hubbell's highest rating (AV) for legal ability and ethics, and is named to the Illinois Super Lawyer and Leading Lawyer lists.
JEccleston@snsfe-law.com, 312.621.4400, www.snsfe-law.com, www.financialcounsel.com.