How to fight back against rising financial fraud

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Financial fraud complaints to the Federal Trade Commission (FTC) quadrupled during the past decade and are up 35 percent in the past three years alone, according to The Rise of Financial Fraud, a recent brief from the Center for Retirement Research at Boston College.

According to the brief, the public is generally unaware of the pervasiveness of fraud because the media primarily focuses on major scams, such as Bernie Madoff's Ponzi scheme. The fact is, in recent years, more than one million financial fraud complaints have been filed annually with the FTC.

The Boston College brief attributes the rapid rise in financial fraud to the rising use of the Internet, which enables thieves to contact thousands, even millions of potential victims with a single keystroke. Sadly, their victims are often seniors who are trying to make up for recent investment losses or whose cognitive skills may have declined. And there's one other important reason scammers target seniors: "That's where the money is," to quote famous bank robber Willie Sutton.

Detecting financial fraud

The Boston College brief includes a list of fraud's red flags, including investments that sound too good to be true, ones that offer a very high return that's "guaranteed," offers that require an urgent response, or proposals that lure prospective investors with a free lunch. The brief warns against paying an advance fee for debt-settlement services or to obtain a higher income tax refund.

The brief also describes fraud's many disguises, including the "senior specialist" who claims to possess special training in dealing with the elderly, the "problem solver" who is empathetic and targets emotionally vulnerable people, and the "magician" who "guarantees" that you can triple your investments if you use his or her services.

So how can you fight back?

To help detect fraudulent investment claims, be aware of the rates of return that available with different types of investments in today's economic environment. For example, the Board of Governors of the Federal Reserve System shows these rates of return in late February:

- 0.52 percent for six-month CDs
- Under one percent for Treasuries with durations of five years or less
- Returns of 1.99 percent for 10-year Treasuries and 2.77 percent for 20-year Treasuries
- Four and five percent returns for corporate bonds, depending on the bond's duration and quality
- Returns of three to four percent for state and local municipal bonds

Double your money in 10 years? That requires an annual return of 7.2 percent for 10 years -- far higher than the above rates. While many investors are frustrated with the current low returns and may be lured by promises of much higher "guaranteed" returns, don't let yourself be tempted: If anybody guarantees that they can substantially beat the above returns, run the other way.

And don't forget to look at the fine print -- many pitches that look like they guarantee a specific return actually have fine print that says things like "At this rate, you could double your money in 10 years," or "It's possible to double your money in 10 years."

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Here's another tip: Find a younger, financially savvy advocate who can review any significant investments you want to make or insurance polices you're thinking about purchasing. This can be a trustworthy relative or friend or, better yet, a financial advisor whom you trust and who isn't paid a commission. This type of help is particularly valuable as you age and are less able to make informed financial decisions on your own.

The bottom line is, you want to secure your retirement, not contribute to the retirement savings of some crook.

  • Steve Vernon On Twitter»

    View all articles by Steve Vernon on CBS MoneyWatch»
    Steve Vernon helped large employers design and manage their retirement programs for more than 35 years as a consulting actuary. Now he's a research scholar for the Stanford Center on Longevity, where he helps collect, direct and disseminate research that will improve the financial security of seniors. He's also president of Rest-of-Life Communications, delivers retirement planning workshops and authored Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck and Recession-Proof Your Retirement Years.

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