Fortune Tellers

~ By Gerald Rome, Colorado Securities Commissioner ~

When my kids were young, they looked forward to visiting Colorado’s Renaissance Festival in Larkspur every year. We’d go grab a turkey leg, watch the knights joust, and could never leave until my daughter could pay a visit to the fortuneteller’s tent. She wanted to find out what her future had in store for her – would she become a doctor? Marry a handsome man? Become fabulously wealthy?

Gerald Rome, Colorado Securities Commissioner

Gerald Rome, Securities Commissioner

These practices were all carried out in harmless fun, but unfortunately, many adults unwittingly fall into these same fantastical beliefs and practices when it comes to investing. Take this pitch for example – “Here’s what I can do for you: I use a short-term trading strategy, sometimes holding positions for only a few minutes. With this strategy, I can guarantee you returns between 12% and 25% on your investment. I hold no positions overnight, which pretty much cuts the risk out completely. In eight years, I’ve never lost money in any monthly period.” Does this sound tempting to you? Perhaps there’s a vacation, a new car, or a child or grandchild’s college education expenses in the back of your mind, and this sounds like a pretty convenient way to fulfill that goal. Or perhaps you’re more skeptical, and think anyone who would fall for this must not be a very intelligent or savvy investor.

In reality, this was the exact pitch used by a local Ponzi schemer who conned investors out of $70 million and is now serving a 40 year prison sentence. And the real surprise is that those who fell for this scam were not the kind of investors you would think. Counted among the 65 victims were a sophisticated mutual fund money manager, a financially savvy securities trader, and a famous local celebrity. Many invested because someone they knew had invested, and thought that person was a smart guy.

Here’s the moral of the story: any financial adviser who tries to guarantee you vast returns, who promises that there is little to no risk involved, or who puts pressure on you to put your money into a certain investment opportunity is likely running a scam. These tactics, dubbed by researchers and educators as “phantom riches” tactics, are designed to pull you in with the promise of fulfilling your financial goals with “get rich quick” methods. The reality is, however, that guarantees and zero-risk investments simply do not exist. If your adviser is telling you otherwise, he or she is likely in the wrong profession. Perhaps he or she would be better suited for a job with the Renaissance Festival – though I doubt even the fortune tellers would want to count such an individual as one of their own.

To help minimize your risk of falling victim to a phantom riches scheme, be sure to check with the Division of Securities to make sure that your adviser is properly licensed, and has no background of complaints or legal issues. And if you feel you or someone you know has already fallen victim to such a scam, please call us at (303) 894-2320.

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