At a recent Christmas gathering I was speaking with a close friend who said, “You were right about that investment Jason. It turned out to be fraudulent.”  Sometimes I hate being right, and this was one of those occasions. Let me share with you what happened.

Several years ago this friend, who is retired, told me they were considering a high yield  investment. This particular investment paid a much higher interest rate than was typically found at banks or was being offered by high quality bonds or dividend paying stocks.

Apparently, they had a relationship with a  past business associate who had told them about this so called  “investment opportunity” and because of that existing relationship, they had a high degree trust and confidence that the investment was a good one. After being consulted, I advised these folks to stay away from this investment as there were too many red flags. Unfortunately, they did not heed my advice. They made an initial investment and started to receive income every month as promised. I remember a year or so had passed, and I asked them how it was going.  They said, “Great we get a check in the mail every month.” I was hopeful at this point that I had been wrong in my initial assessment.

A few years later when they had more money available for investing, they brought the additional funds to the same person and purchased more of these so called “high yield investments”. For a couple of years they received income like clockwork every month, but then one day the income stopped. When they called  the business associate who originally helped them they learned all of their money in this investment was gone. They had been the victim of a fraudulent investment scheme.

You would be surprised how often I come across this same type of story. Just this year alone I have met with people who have collectively lost hundreds of thousands of dollars. In some instances fraud was involved; in other cases they were invested in legitimate investments, but they did not realize the full breadth of the  risk they were being exposed to.

My recent experience with these cases have all had a similar sounding story. People are being offered so called “high yield investments” that are usually being touted as an investment in commercial real estate or in some type of limited partnership structure. In the case of this friend, they were told they were pooling assets, buying commercial property and then leasing this property back to large companies.

The challenge of course is legitimate investment structures such as limited partnerships, and private and public non-traded REITS (Real Estate Investment Trusts) do exist and can operate in a similar fashion to the fraudulent ones. But even these legitimate investments can be very risky, have high fees and very little liquidity.

Because of the low yield environment we have been in for some time, people are considering creative and non-traditional ways to increase their yield and income. So it is no surprise that we are seeing more and more of these offerings all the time.

When evaluating an investment you have typically have three choices: safety, liquidity and rate of return. Unfortunately, you only get to choose two of the three. If you choose safety and liquidity, then you will sacrifice rate of return. If you choose liquidity and rate of  return, then you will sacrifice safety. If you want a higher rate of return and more safety, then you will sacrifice liquidity. There really is no such thing as a perfect investment and weighing all of the pros and cons before taking action is important.

When evaluating any investment be sure to ask the following questions:

1) Ask if the investment is registered. Find out who it is registered with and regulated by. The answer will typically be the SEC or the State Department of Financial Institutions. If using an insurance contract make sure the company issuing the contract is licensed to do business in the State.

2) Is the investment publicly traded? Ask how liquid the investment is. Find out if and when you can get your money back if you need it. Some legitimate investments such as public non-traded REITS can have very little liquidity and carry a lot of risk. Insurance contracts such as fixed and variable annuities may have a surrender charge if you need access to your money early.

I met a woman recently who made an investment in a public non-traded REIT and received income for several years. But one day the income stopped, and as of today, it looks like she will never recover her original investment. No fraud was involved in this case, just a high risk investment that went south. She did not  fully realize the risk of the investment at the time she purchased it. Unfortunately this investment represented 70% of her net worth.

3) Double check on the person offering the investment and make sure they are properly licensed to do so.  You can perform a broker or investment adviser check on FINRA’s website at You can visit the insurance commissioners website to see if your agent is licensed to offer insurance. For Washington State it is

4) Read the prospectus of an investment or the statement of understanding for an insurance contract.  Sometimes a salesperson can gloss over all the risks. The prospectus and/or the statement of understanding will have to detail those risks. If the prospectus says you can lose all of your money, and have little access to your funds, will you be comfortable with those terms?

5) Ask about fees. Often times these legitimate and less liquid, higher risk investments can carry very high fees. Ask you broker how much they are being compensated for recommending them. Insurance contracts pay a commission to the agent selling them. Fees and commissions are typical in the financial services arena, but they create a conflict of interest for you and your financial professional. You want to make sure the investment or insurance contract is truly best for your situation, and not just being offered because you broker or agent needs to make a living.

6)  Ask if your adviser operates as a fiduciary. A fiduciary adviser has a legal obligation to act in your best interest. You might think everyone in financial services would be held to this high fiduciary standard, but this is not the case as many brokers and agents only have to make sure investments are suitable, which is a less stringent suitability standard. Registered Investment Advisor’s and their registered representatitves (RIAs) are held to the fiduciary standard.

7) Check on the financial strength of the company you are going to work with. This is especially important on insurance contracts. The rating agency AM Best has been rating insurance companies financial strength for a very long time —

8) Be careful who you ask for advice. In a study conducted in 2007 by the FINRA Investor Foundation, 70% of fraud victims made an investment based on the advice of a  friend, relative, neighbor or co-worker. Instead or in addition to, consider speaking to a financial professional.

As an Registered Investment Adviser Representative, I feel my duty is not just to help people plan and capture opportunities, but to also help people avoid taking too much risk and avoid becoming  victims of fraud.

Remember if it sounds to good to be true, it probably is. As a general rule of thumb, remember, the higher the yield the higher risk.

This article was also featured in the January 2014  Kitsap Peninsula Business Journal.