Knowing how to spot investment scams is an essential skill for a modern investor.

Collectively, investors represent a gold mine for organised criminals. Think about it: Is there an easier target? Investors are prepared to pay thousands of pounds to a new organisation in return for something intangible. The opportunities for fraud are staggering.

The online space, in particular, can be a dangerous place. It is difficult to tell apart an adventurous investment from a potential black hole.

As the best money laundering books and the best fraud books will explain, you need to be hyper-vigilant to filter out the malicious players in such a large sea of choice.

Follow these three steps to increase your vigilance and detect investment scams with more confidence.

1. Beware of unauthorised firms and unregulated investments

The Financial Conduct Authority (FCA) regulates only certain types of investments and investment firms.

For the maximum protection against scams – you could stick to regulated investments offered by authorised firms, such as a stocks & shares ISA offered by a mainstream financial provider. Doing so will give you the following cover:

Access to the complaints watchdog (the Financial Ombudsman) if you believe you have been treated unfairly
Up to £85,000 compensation if the firm goes bankrupt and you cannot recover your money as a result.

FCA authorisation is not a guarantee that you will not be a victim of fraud, but it provides you with more safeguards than if the firm was not authorised.

How can I tell if a firm has FCA authorised status?

You can search the FCA register of firms to check whether a provider is authorised.

Companies can gain different levels of authorisation, or permission, to carry out different activities, therefore it is essential to check that their permissions cover the proposed investment.

After finding the firm on the register, click to ‘see the requirements that apply to this firm’.

The next page reveals whether the firm has authorised status. Authorisations could cover holding your money and selling specific types of financial products.

You can also search directly on the FCA Warning List to check that an investment firm isn’t flagged as a suspicious or fraudulent organisation.

What is the difference between regulated and unregulated investments?

Even if an authorised firm promotes a particular investment, this provides no guarantee that the FCA considers the investment as ‘regulated’. We can sort regulated investments from unregulated investments using the following rule-of-thumb lists:

Regulated:

Shares
Funds
Cash
Residential and commercial buildings

Unregulated

We should assume that any investments that don’t fall under the regulated categories are unregulated. Examples include:

Land
Mini-bonds (Loans issued directly between a borrowing company and an investor)
Cryptocurrencies such as Bitcoin
Car park spaces
Woodland and forestry
Storage units
Shipping containers
Diamonds and other precious stones
Wine
Gold
Overseas property

How to spot investment scams posing as regulated investments or authorised firms

Unfortunately, this is also an issue. Many scammers present themselves as FCA firms, when in fact they are not. The scammer may be relying on you not looking them up on the register.

More sophisticated scammers steal the identity of a real authorised firm. Like a wolf in sheep’s clothing, they use fake branding to fool investors into handing over their money. The clients may falsely believe that the FCA regulates their investment, only to discover otherwise when the scam unravels at a much later date.

If someone contacts you and claims to represent an authorised firm, you can quickly put their credentials to the test. First, politely end the call. Ring the firm back using a number you have obtained from their official website. Ask the switchboard to put you back in touch with the person you were speaking with.

Are all unregulated investments scams?

‘Unregulated’ is not the same as ‘fraudulent’. ‘Unregulated’ simply means that the investment in question does not fall under the FCA’s remit.

Many investors find legitimate and profitable opportunities in wine, land and gold. Investments such as these, often referred to as ‘alternative investments’, help diversify their basic investment portfolio.

The ‘unregulated’ label merely demands a heightened sense of scepticism. Scammers naturally prefer to operate in areas under lower regulation and therefore these investments will have a higher rate of scams.

When a company approaches you with a scheme which involves an unregulated area, this should now raise a red flag.

2. Watch out for unrealistic promises

Realistic average returns for risky investments range from 4% to 8% per year. Scammers may offer 10% or even 18% per year in an attempt to lure investors.

Sometimes scams will advertise a reasonable-sounding rate of return but will also claim that the investment carries “low risk” or “no risk”. This is equally alarming, due to the unbreakable relationship between risk and return.

High returns will always come with additional risk. This is because investments only offer higher returns to compensate investors for extra volatility.

Therefore, by definition, higher returns will always have higher volatility and therefore can never be “low risk”, and no amount of risk management will reduce risks to nil.

Reality check: Worldwide, investors have placed £billions into US government bonds which pay 0 – 2% interest. Investor accept these low returns because of their risk-free status. Why would so much money stay in these low-return bonds if higher returns elsewhere could be had without risk?

Our advice for how to spot investment scams is to blacklist any printed promotional material or online adverts which promise 8%+ risk-free returns. The scam rate across this group of opportunities is eye-watering.

Are all comforting assurances fraudulent?

This depends on what assurance is provided, let’s explore a few examples:

No history of losses

Investment providers may point to investors never having lost a penny. This declaration might be factually true, and useful information to share. It is certainly not indicative of fraud. However, we need to apply scepticism and not take such assurances at face value. Past performance is not a guarantee of future performance. The historical period may have been short, or during the boom years of an economic cycle. For these reasons and more, losses could still be on the horizon for new investors.

FSCS Protected

Investments may use language such as ‘FCA Protected’ or ‘FSCS Protected’. These terms give the impression that the investment qualifies for the Financial Services Compensation Scheme. Unscrupulous investment companies may emphasise this in a misleading manner.

First of all, for regulated investments, the FSCS protection will probably only cover any cash held with the company, rather than your investment. Secondly, the scheme does not payout just because a regulated investment has underperformed. This is simply the risk you take on as an investor. If a company states that the FSCS scheme will guarantee the return of an investment, run away.

Government-backed

We see this term used in a variety of ways across investment brochures. Some are more valid uses than others!

Some investments, such as Premium Bonds issued by National Savings & Investments (NS&I), are physically financed by the government. This is a very legitimate use of this phrase.

Some companies claim that the government invests in their products, or uses their service.

Detecting investment scams — Funding Circle likes to point out that the government is also an investor

This is little more than a company wanting to ‘show off’ its prestigious customers. Continue to be wary, however, as even government institutions have made poor investment decisions in the past:

Several UK councils and other bodies lost a combined £1bn when Icelandic bank IceSave collapsed during the ‘credit crunch’ of 2009.
In 2019, Kent Council found itself unable to redeem funds from the now infamous Woodford Equity Income fund after requesting a withdrawal. The fund was not fraudulent but had followed a controversial investment strategy of investing in illiquid investments. The fund found itself unable to raise cash to repay investors on demand, and was forced to close the door to outflows until it could sell its investments.
Hampshire County Council found itself the victim of fraud when it invested £7.1m in a fund managed by Bernie Madoffs, which collapsed when it transpired that the miracle fund had been nothing more than the world’s largest Ponzi scheme.

3. How to spot investment scams – look for the hard sell

We all appreciate passion and enthusiasm from the employees that we interact with. Who would buy a cappuccino from the coffee shop that only claimed to sell the ‘Eighth best coffee in the city’?

In contrast, you should seek out the exact opposite qualities in those who manage and promote investments. A responsible adviser acknowledges that all investments could lose their client money, and may not be suitable for all. This sober realisation tends to remove the rosy tinting from the language to sell legitimate investments.

If you see an investment firm using similar sales techniques to a car dealership or butcher, you should, therefore, be very concerned.

All legitimate investment firms understand the following:

No investment is suitable for every investor.
An individual’s personal risk appetite and time horizon are important considerations to take into account.
Firms must explain risks clearly to allow an investor to weigh up the cost and benefits associated with an investment.

By pushing a single investment hard onto all interested parties, scammers break all of these rules in their pursuit of chasing your cash.

What selling techniques should I look out for?

Emotional advertising

Throwing ethical principles to the wind, scams will regularly appeal to peoples emotions and aspirations to seal the deal. Marketing materials are often crammed full of Carribean imagery and supercars.

The exclamation mark is a clear sign that something isn’t right. An excitable tone is another attempt to drive emotional rather than logical decision making.

Cold calling

Investment scams have used cold calling for decades now, and show no sign of ceasing. I have personally received several sales pitches over the phone from dubious sources.

From personal experience, I can reveal that these scammers are not easy to spot. If you are imagining someone speaking broken English similar to a Nigerian email scammer, you couldn’t be further from the truth.

In the past, I have received phone calls from young men with well-spoken, southern English accents. They claimed to be calling from a firm with a generic name such as ‘London Capital Markets’. I kept them on the phone to learn more about what exactly they were peddling, and what their sales pitch sounded like. I came away impressed with their ability to hold a challenging conversation with an experienced investor.

From this experience, I want to share a dire warning for all advanced investors. Do not rely on your intelligence or investment knowledge to discern a real caller from a fake one. On the phone, where talking is the only currency, scammers are in their element. They are more practised at the game than you are. The only way to win is to not play at all.

Refuse all cold calls that relate to investments. Perform due diligence checks on investment opportunities that are right for your basic investment portfolio, at the time that is right for you.

Read more: The best due diligence books

Time pressure

Investment scams may also apply time pressure to encourage an unwise snap decision to invest. For example, the scammer may explain that the fund closes to new investment by the end of the day.

Time pressure removes the opportunity for you to carry out diligent research and speeds up the cash generation process. If you feel pressured to make an investment ‘in the moment’, don’t. Only in a fictitious scenario would an investment opportunity being marketed to retail investors disappear within a matter of hours.

Scammers will say whatever they believe will part you from your cash. However, their linguistic and marketing tricks set them apart from reputable firms. Looking out for aggressive or enthusiastic marketing language is a great can be how to spot investment scams.

A comprehensive checklist for spotting investment scams

I’m delighted to share my own 30-point comprehensive scam checklist for spotting scams like a private investigator.

If you stick to my methodology, you’ll be able to tell apart a legitimate offering from a dangerous doppelganger.

Are the website owners who they claim to be?

This could should be either a private limited or public limited company name. For example 'Stakeholder Investments Ltd' or 'Absolute Returns PLC'.

Websites that process sensitive information will usually encrypt the data which is sent to and from the web server with 'SSL encryption'. If this is the case, a small padlock should be visible to the left of the URL at the top of your browser window.

Clicking on that padlock (or other symbol) will reveal details about the SSL certificate of a site. This can sometimes reveal if a website is trying to trick you into believing you are visiting an authentic domain when in fact you are not.

In the chrome web browser, you can search for other uses of an image online by right clicking and selecting 'reverse image search' as shown below.

This was a search on a photo of the founder of AJ Bell, the stockbrokers. The other webpages listed consistently used the photo to refer to the same gentleman. The following example shows a red flag:

Do you notice that the webpages which feature this image have no common theme. This is because this is a freely available stock photo of a business woman - the type commonly used by fraudsters to fill a website with smiling faces.

For serious sums, aim to carry out business in person if this is possible. If the company can offer no good reason to deny you a meeting - it might be because they're actually based offshore. Many scams, particularly cold calling scams, are run from outside the country.

When visiting the firm's office or investment project, stay alert to warning signs that the office or investment does not actually belong to them. A scammer may use a temporary or rented office space, such as WeWork or Regis to appear legitimate.

The company directors of a successful investment business will be very busy individuals. Bear this in mind if you find yourself receiving hours of personal attention from senior management.

Be skeptical. Would a real business leader have this much time to spare to fuss over a single investor? Does their investment feel consistent with how much they stand to gain from yours?

A legitimate investment company will only generate income from relatively small fees charged on each investment. To a fraudster, every penny you hand over will enrich their coin purse.

Fraudsters will therefore be far more willing to invest their time in courtship with potential investors.

Is the investment company financially sound and well managed?

Search by company name on the Companies House website and look at all the company filings for the last few years.

The accounts of the company will give a snapshot of the balance sheet at a recent date, giving details of its assets and liabilities. The confirmation statement will give insight into the ownership structure of the company (together with the accounts).

The 'People' tab will display all current and past directors of the company. Take note of these names.

Also take note of the registered address and incorporation date shown on the 'Overview' tab.

The Balance Sheet, also known as the Statement of Financial Position shows what a company owns and owes.

To check that a company is liquid, i.e. it can afford to meet its short term obligations using readily sellable assets - compare the 'current assets' value to the 'current liabilities' value. This is result is usually subtotalled as 'net current assets'. If a company has net current assets, we can infer that the business is readily able to pay its bills in the short term.

Next, check that a company is solvent, i.e. testing whether it owns more than it owes in total. This is shown by the 'Net Assets' or 'Net Liabilities' figure near the bottom of the balance sheet.

In the example below, the document does not subtotal net current assets for us, so we would need to do this ourselves by adding all the current asset and liability items together to reach £24.9m. The net assets of the company is given as £30.3m as highlighted.

Search Companies House for the names of each of the directors. Where they have previously held director roles in other companies, research those companies (on Companies House) to check whether they are still active or whether they have been dissolved.

Fraudsters often have a pattern of forming new companies and winding them up when claims and complaints arrive at their door. This would leave a string of dissolved companies in their history at Companies House.

Is the firm authorised to provide or introduce investments?

Enter the legal company name into the online FCA register to see if the firm is authorised.

Don't stop clicking when you see the word 'authorised' against a company name. The FCA gives permission on an activity by activity basis. An 'authorised' firm may have one permission or ten.

Click onto the company name and expand the 'permissions' section. As an example, the following company has permission to hold client money and manage investment funds.

If a firm does not have permission to hold client money, it may only faciliate a payment from you to another party. It would not be permitted to hold funds on your behalf in a client bank account.

The FCA maintains a watchlist of unauthorised firms which it suspects of carrying out unauthorised activities. This is always worth a check, even if your firm appeared to be authorised in step one.

This is because the FCA will flag here when it is aware that scammers have been imitating ('cloning') an authorised business. If you find a match, this will give reason for you to take extra care when verifying the identity of who you are dealing with.

Does the company act professionally and operate with a full staff?

Its humanly possible for a rare typo to slip through the cracks of a company once in a blue moon. However, finding multiple errors or errors on very prominent parts of a homepage is a big hint that you are dealing with a team of one.

The websites of real companies have plenty of content; an overview, a backstory, product information and pages covering administrative matters.

Particularly when following adverts, you can encounter a website that only provides an illusion of depth.

I have seen a stunning example in which every link and every menu button simply redirects to a different part of the same page. Despite looking like a normal website -it was actually a solitary page disguised as a website.

Single page websites usually have only one purpose - to collect your name and contact details. Websites like these don't want to provide you with lots of information, they just want to pique your interest enough to enter your information.

This prevents you from performing good background research, and puts you at the mercy of aggressive sales methods such as frequent phone calls. Best-in-class investments don't need this type of sales technique.

Financial services businesses need to comply with a weight of regulations. If they operate online - the rulebook gets larger.

Scammers have already shown a disregard for the law by engaging in criminal activity. It's therefore unlikely that they would seek to comply with the fine print of less exciting regulations.

GDPR statements (data protection)
Cookie policy
Privacy policy
Terms and conditions / Terms of use

Does the website clarify matters such as whether they are authorised by the FCA, or are an appointed representative of an authorised firm?

The absence of any legal language implies carelessness at best, and disregard for the law at worst.

You will often encounter boasts of awards, media outlet names used as badges of honour on webpages.

When used properly, these link back to the award or piece of coverage, to allow you to instantly confirm they're true.

If they're merely shown as flat images, this raises suspicion. A Google of the company name and the relevant award or newspaper/TV station should settle the case.

Be aware that some companies take a loose interpretation of the phrase 'as seen on'. They count advertisements, which of course, should convey little prestige onto the company. Advertising coverage signifies nothing more than the existence of a marketing budget.

Membership of various institutes, trade bodies and industry groups can also be disingenous. The membership of some organisations involves nothing more than ticking a box and paying a membership fee. Few trade bodies play a very active role in regulating and checking the quality of its members work.

Is the company as large and successful as it claims?

Run the domain name through Moz.com's Domain Authority (DA) scoring system. DA is a measure of the quantity and quality of the links pointing towards a website.

DA is scored in a range between 1 and 100, with 100 representing a behemoth like Google. A score of one suggests that the web is barely aware of its existence. An typical score for a commercial website would be 20 - 40.

DA isn't a solid method of deciding whether a site is legitimate. Web activity can be bought, and notorious websites receive links too.

The best way to use DA is as a sense check against grand claims main on investment websites. If a website claims to be an industry leader, and yet it has a DA of 4/100, you can be sure that the claim is false.

Alexa is an offshoot of Amazon. Alexa's site info feature gives a gauge of web traffic levels to popular websites.

Due to the way that Alexa captures information, it cannot provide data for websites beyond the top 1,000,000 on the web.

This is still helpful to us. Input the domain of an apparantly popular website. If it returns the following blank result, this indicates that their popularity might be exagerated.

Trust Pilot is a useful website which providers reviews on the trustworthiness of businesses all around the world. Reviewers are discouraged from mentioning the quality of individual products themselves. They're asked to consider the honesty and integrity of the business they dealt with.

This makes Trust Pilot a helpful tool to identify bad actors in the investment industry. However, it can also be susceptible to manipulation and fake reviews.

Apply these four tests to 'audit' the reviews before accepting a Trust Pilot score as genuine:

Are the reviews written in reasonable English?
Do the reviewers have names that correspond to the country in which the investment firm operates?
Have many of the reviewers written more than one review?
Do the reviews provide genuine insights into the way the company does business?

If you answer yes to all these questions, then the reviews are probably genuine.

By this point, you have collected a lot of information from different sources. It's time to look through your notes and make sure that everything stacks up.

Does the address on the website correspond to the address on Companies House?
Does the company number and/or FCA number on the website agree to the information on Companies House and the FCA register?
Do key terms of the investments stated on the initial landing page, agree to the KeyFacts document, prospectus or other information you have subsequently seen?

Because a scammer doesn't have the truth to use as a reference point, key facts and numbers can often change between webpages or documents.

Does the company have a culture of compliance and ethics?

Does the website include plenty of risk warnings, or does it play down the risk?

There are many cautious pieces of wording found on genuine investment websites. Making customers aware of risks is the easiest way to protect a firm from customer complaints and legal risks, so proper firms do their best to inform their customers of the possible downside.

Examples could include:

"Past performance is not a guarantee of future performance"

"The investments are volatile and may lose value"

"You should consider seeking financial advice before investing"

"The investment is highly illiquid and therefore this is intended as a long term investment"

"This opportunity is only available to sophisticated investors"

Here's a real example from a well known UK stockbroker website:

In a large financial transaction, both parties should be checking each other. This means that an investment firm should be asking lots of questions too.

To combat money laundering, firms are required to verify your identity before they can accept your funds. This is to protect them from accidentally dealing with the proceeds of crime. A form of ID, or a search similar to a credit check will be needed to complete this process.

If this has been completely absent from the sign-up process, this is a concern.

Does the investment opportunity feel realistic?

If an investment is projected to return more than 6% per year, ensure that you understand 'why' the reward is so high.

Earning more than 6% is equivilent to investing in the stock market. Investments in the stock market bring volatility and a real risk of loss.

If an investment opportunity promises a 10% return without similar risks - you must be missing something.

An investment firm would gladly pay a lower return to investors if it could. The very fact that it needs to offer such a high return speaks volumes about the nature of the investment.

A high return doesn't communicate what type of risks are present, but it gives a strong indication of the overall level of risk.

A 'guaranteed' return is not guaranteed. When we hear the word guaranteed - we think of a definite result.

In investment terms, a guarantee is completely dependent on whether the guarantor has enough money to follow through on their promise.

There are many investments touting a 'guaranteed yield', but there are very few that are backed by a bank or investment house with $billions of assets.

Even if the balance sheet of a small company is currently strong, you should be aware that directors have been known to act in bad faith and remove assets from the company in its final weeks.

Does the situation feature any other scam indicators?

If 25% of your deposit is redirected to a sales agent instead of being invested in assets - what hope does your investment have?

Avoid being caught in that trap by searching on the investment firm website and on Google for 'affiliate schemes' or 'referral schemes' relating to the investment manager. Some schemes are kept private, but others are made public to encourage participation.

If you learn that the investment manager is prepared to pay more than 1% for investor funds, stay away. This cost will ultimately be passed onto you, either through high management charges or deductions from your investment.

Investors rarely invest in a scam without noticing at least one piece of information that didn't really quite right. Unfortunately, scammers are master manipulators who understand that the best way to override rational doubts is to use emotion.

Emotion could be joy, ambition, and greed but also the fear of missing out.

If you have ever attempted to buy a car or house, or have attended an auction before, you will appreciate the way in which the pressure of a moment can be overwhelming. If those moments have been contrived by scammers, it might pave the way for a huge financial mistake.

Cold calling is perhaps the biggest single indicator of whether an investment opportunity is a scam.

Phone calls provide anonymity, are more difficult to fact check and can be quite invasive. Cold calling to promote dodgy investment products even has a name; the 'boiler room scam'. The name references the idea that the fraudsters pretend to be a prestigous investment firm, but could in fact be calling from a mouldy boiler room.

The best advice I could give is to suggest you simply refuse to engage with anyone who cold calls you to promote an investment. There are so many useful online avenues to explore investment opportunities. Your options will not be narrowed in the slightest by slamming down the phone once in a while.

Trustworthy Resources

When falsehoods and fake news abounds, you need to have a clear set of authoritative sources to hand. I’ll point you to the websites that give me reliable information which I use to bust online criminals.

The following websites are have proven themselves to be reliable sources of information.

When reading the best personal finance books, be wary for authors who use their titles as a sales pitch for further courses and consultations. These sometimes come with high prices and are sometimes sold with aggressive sales techniques.

The best get rich quick books I’ve highlighted on our dedicate page don’t do much of this, but it’s a common criticism of many other get rich quick books still on shelves today. Be sure to do plenty of online research before signing up to courses by an author.

Remain aware of the possibility that the web may have lots of positive reviews or pages written by affiliates looking to earn a commission by promoting the scheme. The high margins made on such courses allows the course providers to remunerate such affiliates quite highly.

A financial adviser is like an insurance policy against scams

Use an FCA authorised independent financial adviser to guide you into the investment. They may advise against the investment for other reasons.

Even if you go ahead, you will have some protection under the Financial Services Compensation Service if the investment turns out to be a scam. This would be on the basis that you may be able to claim that the advice was negligent.

Only invest a small proportion of your wealth. The FCA recommends never investing more than 10% of your funds in a single investment. I further recommend you apply a more conservative 5% rule if the investment represents a single asset.

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Learning Summary

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How to Spot Investment Scams

Advertised returns above 8% per year are a red flag. Challenge why this could be the case.

'Risk free' or 'guaranteed' returns above 2% are equally suspicious.

For maximum safety, stick to regulated investments. These include mainstream stocks & shares, funds, and property.

Deal only with FCA authorised firms. Use the online FCA register to check.

Watch out for aggressive sales techniques, including bold assurances, and the absence of risk warnings.

Be suspicious of language designed to invoke emotion or creates time pressure to encourage you to make a decision.

Ignore cold callers completely. Don't even express an interest in receiving 'additional information'.

Above all, exercise a relentless level of skepticism. If in doubt, don't invest.

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Before you move on, please leave a comment below to share your thoughts. Have you been the victim of an investment scam? Have you come across any while researching investments online? Share them below!

Comments 2

Steven zalunardo
14 June 2024 at 21:39

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