According to the Merriam-Webster Dictionary, the word "alert" is defined as able to think clearly and to notice things; and the word "prevention" is defined as the act or practice of stopping something bad from happening.

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When considering any potential investment, watch out for these warning signs of investment fraud:

• Promises of high investment returns.  Be highly suspicious if the promoter guarantees you a high rate of return on your investment.
• Pressure to buy RIGHT NOW.  Be skeptical if the promoter pitches the investment as a "limited time only" opportunity, especially if the promoter claims to base the recommendation on "inside" or confidential information.
• Sounds too good to be true.  Exercise caution if the investment sounds too good to be true.  Investments providing higher returns typically involve more risk.

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Self-Directed IRA Alert

Investor Alert: Self-Directed IRAs and the Risk of Fraud

A self-directed IRA is an IRA held by a trustee or custodian that permits investment in a broader set of assets than is permitted by most IRA custodians. Most IRA custodians are banks and broker-dealers that limit the holdings in IRA accounts to firm-approved stocks, bonds, mutual funds and CDs.

Custodians and trustees for self-directed IRAs, however, may allow investors to invest retirement funds in other types of assets such as real estate, promissory notes, tax lien certificates, and private placement securities. While self-directed IRAs may offer investors access to an array of private investment opportunities that are not available through other IRA providers, investments in these kinds of assets may have unique risks that investors should consider. Those risks can include a lack of disclosure and liquidity, as well as the risk of fraud.

Fraud promoters who want to engage in Ponzi schemes or other fraudulent conduct may exploit self-directed IRAs because they permit investors to hold unregistered securities and the custodians or trustees of these accounts likely have not investigated the securities or the background of the promoter.

Variable Annuities: Beyond the
Hard Sell

Variable annuities, especially those with Guaranteed Lifetime Income, have become a part of the retirement and investment plans of many Americans. There are many reasons why investors look to annuity as a retirement savings vehicle.

Unfortunately, many investors were misled by highly compensated insurance agents and bought variable annuities for wrong reasons, including "guaranteed annual returns", "up-front cash bonus", among others. Annuity investors often mistakenly believed that their investments offer complete downside protection and then surprisingly found out many years later they lost money. Most of them received much less than initially promised when they wanted to withdraw the whole investment due to unexpected life needs.

• Annuitization is the process of converting an annuity investment into a series of periodic income payments. Do not confuse "Annuitization Value" (or Contract Value or Benefit Value) with the often lower "Cash Value" (or Surrender Value or Investment Value). The cash value is your investment return minus the additional cost of annuity contract.
• Variable annuities are not suitable for meeting short-term goals because substantial taxes and insurance company charges may apply. Variable annuities also involve investment risks and higher insurance cost.
• For most investors, it will be advantageous to make the maximum allowable contributions to IRAs and 401(k) plans before investing in a variable annuity.
• If you are investing in a variable annuity through a tax-advantaged retirement plan (such as a 401(k) plan or IRA), you will get no tax-deferred advantage from the variable annuity.
• There are always additional charges for the added benefit provided by variable annuity. Carefully consider whether you need the benefit.
• Variable annuities with bonus credits may carry a downside because their higher expenses that can outweigh the benefit of the bonus credit offered.

Variable Annuity Alert

Private REIT Alert

Alert about Investing in Non-Traded REITs

A real estate investment trust (REIT) is a company that owns and may also operates its income-producing real estate or real estate-related assets.  The income-producing real estate assets owned by a REIT may include real assets (e.g., an apartment or commercial building) or real estate-related debt (e.g., mortgages). 

Many private REITs (non-traded), even they are registered with the SEC, pose risks different than an investment in a publicly traded REIT.

• Lack of liquidity - Non-traded REITs are not liquid investments, which mean that they cannot be sold readily in the market. The redemption programs are typically subject to significant limitations and may be discontinued at the discretion of the REIT without notice.
• High fees - Non-traded REITs typically charge high upfront fees (up to 15%) to compensate a firm or individual selling the investment and to lower their offering and organizational costs. In addition to the high upfront fees, non-traded REITs may have significant transaction costs, such as property acquisition fees and asset management fees. 
• Distributions may come from principal - Investors may be attracted to non-traded REITs by their high "incomes", but actually "distributions" which often include the return of principal. These incomes may be referred to as "dividend yields".
• Lack of share value transparency - Because non-traded REITs are not publicly traded, there is no market price readily available.  Consequently, it can be difficult to determine the value of a share of a non-traded REIT or the performance of your investment.
• Conflicts of interest - Non-traded REITs are typically externally managed, meaning the REITs do not have their own employees. The external manager may be paid significant transaction fees by the REIT for services that may not necessarily align with the interests of shareholders.

Investment Newsletters Used as Tools for Fraud

Investment newsletters come in many forms.  They may be found online or in hard copy; they may be available for a fee or free of charge.  Some newsletters address general securities topics, such as which types of stocks, bonds, or funds might make good investments.  Others may provide commentary and analysis about particular companies, investment products, or financial trends.

While many investment newsletters are legitimate, some are used to carry out schemes designed to deceive investors.  Such schemes can include:

• Touting – promoting a stock without properly disclosing compensation received for promoting the stock. 
• "Pump and dump" – pumping up a company’s stock price by making false and misleading statements to create a buying frenzy, and then selling shares at the pumped up price.
• Scalping – recommending a stock to drive up the stock price and then selling shares of the stock at inflated prices to generate profits.
• Undisclosed conflicts of interest – falsely claiming to provide independent analysis or failing to explain conflicts of interest (or biases), including financial incentives, that may influence the investment recommendations. 
• False performance claims – misrepresenting the track record of the newsletter’s investment recommendations.
  

Investment Newsletter Alert

Structured Product Alert

Alert About Investing in Structured Notes With Principal Protection

The Securities and Exchange Commission's (SEC) and the Financial Industry Regulatory Authority (FINRA) have both issued investor alerts to educate investors about the risks of structured notes with principal protection, and to help them understand how these complex financial products work.

Structured notes with principal protection typically combine a zero-coupon bond — which pays no interest until the bond matures — with an option or other derivative product whose payoff is linked to an underlying asset, index or benchmark.

The underlying asset, index or benchmark can vary widely, from commonly cited market benchmarks to currencies, commodities and spreads between interest rates. The investor is entitled to participate in a return that is linked to a specified change in the value of the underlying asset. However, investors should know that these notes might be structured in a way such that their upside exposure to the underlying asset, index or benchmark is limited or capped.

Investors who hold these notes until maturity will typically get back at least some of their investment, even if the underlying asset, index or benchmark declines. But protection levels vary, with some of these products guaranteeing as little as 10 percent — and any guarantee is only as good as the financial strength of the company that makes that promise.

Structured notes with principal protection contain risks that may surprise many investors and can have payout structures that are difficult to understand. The low interest rate environment might make the potentially higher yields offered by structured notes with principal protection enticing to investors. Investors must realize that chasing a higher yield by investing in a structured product could mean winding up with an expensive, risky, complex and illiquid investment.

Closed-End Fund Distributions: Where is the Money Coming From?

In a low interest rate environment, Closed-end funds have become desirable products among some "smart" investors because many offer high distribution rates, as high as 6 percent or more. But be aware that a fund's distribution rate is not the same thing as its return, even if the numbers might look similar. In addition, Closed-end funds are often associated with additional problems involving higher operating expense, initial purchase (IPO) sales charges, less liquidity, higher volatility, unpredictable market prices due to premium and discount, leverage risk and margin interest cost, and additional tax implications.

Before you invest, be sure you understand where the closed-end fund is getting the money to pay distributions. In some cases, part of the distribution comes from the return of principal. Not to confuse a closed-end fund's distribution rate with the fund's total return.

When looking at closed-end funds and traditional mutual funds, keep in mind that distribution rates and yields are different measures. A mutual fund's yield shows its interest and dividend income expressed as a percentage of the fund's current share price. With a closed-end fund, the distribution rate might also include a return of principal.

Closed-end funds aren't the only investment that offers distribution rates to attract investors. When considering an investment in non-traded real estate investment trusts (REITs), business development companies (BDCs), or master limited partnerships (MLPs), you should ask the same question about distributions.

Closed-End Fund Alert