How To Avoid Financial Scams

Unfortunately, like any industry, there are always snake oil salesman and even fraudsters.

The trading and investing world is no different, with many ‘traders’ and educational providers out there claiming to teach people to make thousands and all in just half an hour a day.

Sadly, the reality is very different. Trading is a long and hard process, and the failure rate is high. It is not easy, and anyone claiming that it is easy to learn and put into action is peddling a false narrative. Many educational providers make their money from selling courses and tip sheets rather than actual trading and investing.

Whilst mentoring and education can provide a boost to a learning curve, it cannot replace hard work and dedication. If trading and investing was an easy way to become rich – then surely everyone would be rich. Remember the golden rule: if it seems too good to be true.. it probably is.

Checklist For Avoiding Financial Scams 

When it comes to the trading and investing world, you can never be too careful and guarded over your money.

• Check the FCA’s Warning List
• Check that the firm or individual is regulated by the FCA
• Check to see if the company actually exists on Companies House – then do a Google search on the directors to see if they have been involved in fraudulent activity in the past
• Check online review websites – be aware that many scammers will create fake testimonials to talk up their own service and so reviews cannot be trusted
• Check forums for potential red flags and other user experiences
• Use whois – this will tell you when the website was created and who owns it
• If in doubt, please feel free to send me an email at michael@shiftingshares – however, I am not FCA authorised and I cannot give advice

The Attraction Of Trading

Trading can be exciting when looking from the outside in. The potential for high financial rewards, working from home, and constant action is a seductive idea. But the reality of hard work, stress, and long hours is often forgotten – and not to mention the high rates of failure.

The oft-quoted statistic for the failure of traders is 90%+,  with Barber, Lee, Liu, & Odean (2010) concluding that 75% of day traders lose money.[1] The idea of one being able to sip cocktails by the pool, press a few buttons, then go for lunch and take the rest of the day off is just a fantasy pushed by scammers hoping to lure in the gullible. But this advertising clearly works – if it didn’t these people wouldn’t be around.

Here are several things to be aware of in the trading and investing world.

The Binary Options Signals Scam

I exposed this scam in MoneyWeek (Britain’s best-selling financial and economic weekly magazine) in February 2020, when many of the national newspapers were promoting scammers only to denounce them as frauds weeks later.

This is a frequent scam on Instagram, where the scammer will fake a lifestyle in order to persuade the victim to sign up with their affiliate broker. This involves pictures with supercars, which are hired for a day to take plenty of photographs and keep the pretence that the ‘trader’ bought the car, and they will offer ‘free signals’ telling you that you can trade and make similar cash.

Selling, marketing, or distributing binary options to retail consumers was banned by the Financial Conduct Authority (FCA) on 29/03/2019 because they were classed as highly speculative and gambling. Most people who trade these binary option bets lose money.

Since the ban, the scammer now offers these signals for free, as many forex brokers will pay several hundred pounds, and in some cases over £1,000 in order to introduce a client who deposits a certain amount of money into their account. This is a fact as I have been offered various sums to recruit punters to forex brokers.

The broker will pay this because it knows that most of its clients will lose money. When a client takes a position then a reputable broker will seek to hedge that position and net it off elsewhere. For example, if a client buys 2,000 shares in Glencore, the broker is now exposed to that position risk. However, if the broker sells 2,000 shares in Glencore then the broker has now hedged the client’s position.

But what if a broker knows that in six months 90% of their clients will have blown their accounts? If they don’t hedge, then the broker is exposed to that position risk – only when the client loses money, the broker gains it as the position is not hedged.

So if a broker makes money from losing clients, then clearly the broker would make more money by having more losing clients. How do they recruit more clients? Simple! Pay people to introduce more clients to them.

“Show me the incentive and I will show you the outcome.”

Charlie Munger, vice chairman Berkshire Hathaway

What is the best way to get someone to sign up to a forex broker and deposit money? Create a fake lifestyle on Instagram and pretend to make a living trading. Pictures of supercars, houses that are owned by someone else, photographs of cash, clothes that are returned after the snap is taken – this relentless barrage of fake luxury is posted in order to get people to sign up to a broker where the instagrammer receives commission.

However, it gets worse.

Many forex brokers will offer the introducer a commission every time the client they introduced places a trade. Hence, the free signals. Telegram and Whatsapp groups are spammed with these signals trying to get clients to trade, so the introducing scammer can rack up more money. The introducer can even widen the spread (the price to buy and sell) to add even more commission.

Sometimes, the broker will do its best to help its clients lose money.

The ‘Free Seminar’

Free trading and investing seminars are ran up and down the country in an attempt to get people to come.

Very often, the free seminar will contain a few bits of basic trading advice (like cut your losses) that can be found very simply on Google, and the rest will be a sales pitch. You will be shown pictures of supercars (why is it always supercars?), flash watches, holidays, and again shown a lifestyle that is claimed to be funded from trading the markets.

At the end of the seminar, the course that is being promoted (that can cost over £15,000) is being sold – “for today only” – at a big discount, but there are only two courses left. High pressure sales tactics are used, including people standing at the doors with credit card machines, in order to encourage people to feel like they are going to miss out.

Unfortunately, from some providers it is very difficult to obtain a refund if you find that the course does not meet your expectations.

Just because a seminar is free does not mean it is a scam. However, many scams involve the use of a free seminar to lure punters in. It is wise to always check the online reviews before attending one of these as walking into a two-hour long sales pitch is a waste of your precious time.

The Boiler Room

A reputable looking website will be created, often with a similar sounding name to an existing financial institution, in order to induce a sense of familiarity within the potential victim.

The website will look kosher, with names and biographies of suited-up directors, sometimes with LinkedIn icons (that if clicked lead nowhere because the directors don’t actually exist).

It will offer reasonable and believable returns for its clients with a focus on low risk investments. This is to maintain the illusion that the firm could be real.

The website will exist purely to generate leads and very often there will be a “book a free no obligation consultant” where one can schedule a call with the firm to see if they are a fit.

Once on the call, stories of previous investment returns will be brought up, and how there is an investment that is closing right now. High pressure sales tactics are used in order to get the potential victim to hand over their cash, which then disappears never to return again. Or in some cases, it stays around to sucker the same person again and again. Remember Aerotyne International from Wolf of Wall Street? Stratton Oakmont, the broker that Leonardo di Caprio worked at, was a boiler room.

The Binary Options Account Manager

This a variation on the affiliate scammer who pretends to trade but makes the money introducing clients who are then helped to lose, as a spread betting firm may have an “account manager” that persuades people to invest.

The firm will manipulate the client’s account to show that it is generating cash and making money, in an attempt to lure the client to deposit more cash.

If the client gets suspicious, or wishes to withdraw, the spread betting firm will make it difficult to withdraw and sometimes even refuse, only for the client in the meantime to ‘lose’ all of the cash sitting in their account.

The Trader Who Trades Your Money

This is a scam whereby the trader will offer to trade your money for you and keep a cut of the profit. There is never any mention of what happens if the trader loses money.

Anyone who manages money on someone else’s behalf needs to be FCA authorised to do so. It doesn’t matter how good they claim to be, or how reputable they seem, if they are not authorised by the FCA then they are breaking the law.

These regulations exist because of ponzi schemes – whereby the scammer continuously recruits more and more people, using the new money to give to the old clients as “profits”. These happy clients then attract more new clients.

Eventually, the scam falls apart, but not before the scammer has spent or squirreled away plenty of the money. If the money is spent, then victims of the scam have almost no hope of ever seeing their cash again.

Unfortunately, the regulation for these scams – which destroys peoples’ lives and can take their entire life savings – is very lenient, which means the scammer is free to then go and destroy more lives.

The scammer will often boast about how much money they are making and post (always in hindsight) about the trades that they made. This is in an attempt to get people to hand over their cash.

Ponzi Scheme Scammer

When I was new to trading, I found a Facebook group where a man ran a daily webinar. I was new, and so I listened a few times, only for the host to start to pressure me to try trading (but only with his broker).

Abruptly, he said that he was closing the chatroom and the group and was going away for a bit. Very mysterious. Until I found a newspaper article saying that he had been jailed for fraud. 

The scammer was released from prison last year and has since started offering binary options signals.

Unauthorised Trader Scammer

In another instance – again in a Facebook group – one member had been posting pictures of his “profits” for weeks, then started direct messaging members of the group offering to trade on their behalf. He got talking to one woman, and he said his car was being fixed in her area and it would be nice to meet up and if he could ‘pop in’.

She agreed, and once the scammer and his wife were in her house, they became pushy and had a contract they wished for her to sign. The man also claimed that having cancer had made him realise that he could help others to make money, and that he worked for the Samaritans. This incident was reported to the FCA and Action Fraud, only for the potential victim to be told nothing could be done as she hadn’t actually handed any money over. The scammer is no doubt trying to lure in more gullible victims.

If you want to join a Facebook group free from scammers to discuss UK stocks, you can join mine here.

The Overseas Pension Scam

This scam involves fraudsters cold calling lists of numbers and asking the potential victim if they are aware of “new regulations about your pension”. The potential victim is then told about phoney new laws and that they can help by transferring their pension overseas to protect it.

Once the pension is transferred it will be churned over and over to rake in commissions for the scammers with little regard to the value of the pension.

This almost happened to a member of my family – the scammer had cold called and even driven up to my hometown to assure my family member of any concerns. The documentation to transfer the pension overseas was going to be signed the week after until I heard about it and explained the scam.

If you want to learn how to trade and invest your own money safely, then sign up for your free copies of my books below.

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[1] Barber, Brad M., Yi-Tsung Lee, Yu-Jane Liu, and Terrance Odean, 2010, Do Some Individual Investors have Skill: Evidence from Day Trading, working paper.