U.S. OTA Public Information

What's driving vulnerability to fraudulent investment offers



Using advanced statistical analysis, the following characteristics, behaviours, and attitudes help explain some of the reasons why certain investors are more vulnerable than others:
 

  1. Understanding the trade-off between risk and return: Individuals who don't understand the fundamental relationship between investment risk and return are more vulnerable to fraudulent offers.  The higher an investment's rate of return, the greater the associated risk. This is a basic market principle that 43% of older Individuals don't understand. The study shows that pre‐retiree Individuals in their 50s are more vulnerable than older Individuals. This suggests that there is a higher likelihood of making irrational investment decisions in the 10 to 15 years before retirement.
     
  2. Most concerned about rates of return: One-in five (21%) with savings cited ?low rates of return? as their primary concern as an investor.  Their next greatest concern was the economy (10%), capital preservation (9%), market volatility (9%), and retirement income (8%). When combined with other vulnerability factors identified in the survey, these worries can cloud investors? judgment, making it much harder to recognize fraudulent investment offers.  
     
  3. Unrealistic expectations of market returns: Individuals are more vulnerable to fraudulent investment offers if they have an unrealistic expectation of the current market rate of return.   Only 25% of older Individuals have a realistic expectation of current returns (that is, annual returns of less than 4%1 ). Over a third (35%) of those surveyed have unrealistic expectations of current market return, while 40% have no idea. Not knowing what to expect from the market makes one more vulnerable to someone who promises unrealistic returns, especially when the offer comes with the promise of low or no risk.
     
  4. Exposure to risky sales situations: The survey reveals that more than half (53%) of older Individuals regularly involve themselves in risky sales situations.  Unfortunately, those who do so are more vulnerable to fraudulent offers than those who stay away.  Risky sales situations include attending sales presentations, listening to entire sales pitches when someone tries to sell you something over the phone, giving away personal information in exchange for free promotional materials seen advertised, and reading unsolicited emails or other forms of social media.
     
  5. Saving for the future: Individuals with little or no savings are more likely to be vulnerable to a fraudulent investment offer. A troubling finding in the survey is that 30% of older Individuals currently have no savings set aside for the future. This puts them most at risk  of losing what little money they have to scams.
     
  6. Poor investment advice: The survey finds that 1-in-5 (20%) older Individuals regularly consult with friends and family about an investment and those who do are more vulnerable to fraudulent offers. This suggests that individuals aren't taking responsibility for their own due diligence when it comes to investment decisions, instead relying on Individuals who potentially aren't qualified to give investment advice when they should seek advice from a registered investment advisor, or other qualified professional.  
     
  7. The financial fear factor: : Finally, the study reveals that the fear of running out of money in retirement is a strong indicator that one could be vulnerable to a fraudulent offer. Nearly half (49%) of older Individuals say they are afraid of running out of money during their retirement. Another 42% say they find it difficult to make ends meet and this proportion is significantly higher among those who are vulnerable to fraud.  

Using advanced statistical analysis, the following characteristics, behaviours, and attitudes help explain some of the reasons why certain investors are more vulnerable than others:
 

  1. Understanding the trade-off between risk and return: Individuals who don't understand the fundamental relationship between investment risk and return are more vulnerable to fraudulent offers.  The higher an investment's rate of return, the greater the associated risk. This is a basic market principle that 43% of older Individuals don't understand. The study shows that pre‐retiree Individuals in their 50s are more vulnerable than older Individuals. This suggests that there is a higher likelihood of making irrational investment decisions in the 10 to 15 years before retirement.
     
  2. Most concerned about rates of return: One-in five (21%) with savings cited ?low rates of return? as their primary concern as an investor.  Their next greatest concern was the economy (10%), capital preservation (9%), market volatility (9%), and retirement income (8%). When combined with other vulnerability factors identified in the survey, these worries can cloud investors? judgment, making it much harder to recognize fraudulent investment offers.  
     
  3. Unrealistic expectations of market returns: Individuals are more vulnerable to fraudulent investment offers if they have an unrealistic expectation of the current market rate of return.   Only 25% of older Individuals have a realistic expectation of current returns (that is, annual returns of less than 4%1 ). Over a third (35%) of those surveyed have unrealistic expectations of current market return, while 40% have no idea. Not knowing what to expect from the market makes one more vulnerable to someone who promises unrealistic returns, especially when the offer comes with the promise of low or no risk.
     
  4. Exposure to risky sales situations: The survey reveals that more than half (53%) of older Individuals regularly involve themselves in risky sales situations.  Unfortunately, those who do so are more vulnerable to fraudulent offers than those who stay away.  Risky sales situations include attending sales presentations, listening to entire sales pitches when someone tries to sell you something over the phone, giving away personal information in exchange for free promotional materials seen advertised, and reading unsolicited emails or other forms of social media.
     
  5. Saving for the future: Individuals with little or no savings are more likely to be vulnerable to a fraudulent investment offer. A troubling finding in the survey is that 30% of older Individuals currently have no savings set aside for the future. This puts them most at risk  of losing what little money they have to scams.
     
  6. Poor investment advice: The survey finds that 1-in-5 (20%) older Individuals regularly consult with friends and family about an investment and those who do are more vulnerable to fraudulent offers. This suggests that individuals aren't taking responsibility for their own due diligence when it comes to investment decisions, instead relying on Individuals who potentially aren't qualified to give investment advice when they should seek advice from a registered investment advisor, or other qualified professional.  
     
  7. The financial fear factor: : Finally, the study reveals that the fear of running out of money in retirement is a strong indicator that one could be vulnerable to a fraudulent offer. Nearly half (49%) of older Individuals say they are afraid of running out of money during their retirement. Another 42% say they find it difficult to make ends meet and this proportion is significantly higher among those who are vulnerable to fraud.