Protecting Family Finances by Avoiding Fraud

By Karianne Salisbury, Church Magazines

Editor’s note: In February 2008 the First Presidency issued a letter to Church members warning against becoming entangled in fraudulent investments. The following article explores some of the common warning signs of fraud.

As a young college graduate, Marshall Romney knew very little about investing when he became interested in the money market. After talking with co-workers who were making a profit through gold and silver investments, Brother Romney decided this was the investment for him. He bought a bag of coins, arranged to store the coins with the company he purchased them from, and later used a bank loan to buy more bags.

Unfortunately, the value of the coins stopped going up and started going down. In addition to getting into debt, Brother Romney discovered the company he invested in had disappeared. They had exploited their customers by selling nonexistent bags of gold, which they conveniently offered to store in their secure warehouse. Brother Romney was a victim of fraud.

Like many profiting from investment schemes, this company had capitalized on what was a very hot market at the time. But swindlers won’t stop there.

Brother Romney, now a professor at Brigham Young University with a research specialty in fraud, said cases of fraud are becoming more common and are a frequent concern for everyone, including Church members.

“Today investment fraud comes in all shapes and sizes, but many share similar characteristics that should raise suspicion,” he said.

While any investment holds some level of risk, schemes designed to deceive will often demonstrate a sense of urgency, propose a guaranteed profit with little risk, or persuade by using well-known referrals.

Sense of Urgency

An opportunity that requires an immediate response is typically a clear sign of fraud. Someone trying to sell an opportunity may try to persuade by saying it’s the chance of a lifetime or only a certain number can participate, but the need for a quick decision means there is little or no time to think about the commitment or to check the background of the investment.

Elder M. Russell Ballard of the Quorum of the Twelve Apostles emphasized the importance of carefully evaluating financial decisions in a 1987 general conference address.

“There are no shortcuts to financial security,” Elder Ballard said. “Do not trust your money to others without a thorough evaluation of any proposed investment. Our people have lost far too much money by trusting their assets to others. In my judgment, we will never have balance in our lives unless our finances are securely under control” (“Keeping Life’s Demands in Balance,” Ensign, May 1987, 13).

Fraudsters will try to create a sense of urgency to encourage investors to jump in before various concerns or anxieties can settle. It is important to take the time to carefully consider each aspect of the decision. A quality investment opportunity will be around long enough to allow the time needed to fully contemplate the options.

Guaranteed Profit, Little Risk

Who could turn down an investment opportunity with virtually no risk and guaranteed profit? It almost seems too good to be true, and according to Brian Sudweeks, an associate professor of finance at Brigham Young University, it probably is.

“No one can promise a consistently high specific rate of return, and there are no ‘get rich quick’ schemes that work on a consistent basis,” Brother Sudweeks said. “Guaranteed high returns are never guaranteed or high.” But promoters will often propose such ideas, appealing to the desire to see a fast return and immediate profit.

Brother Sudweeks encourages potential investors to apply two important principles to any investment decision.

“First, know what you invest in and whom you invest with,” he said. “Second, invest only with high-quality individuals and institutions.”

Often a scheme continues to operate simply because investors don’t know what they are investing in, only that they see a return. As new investors contribute money, those funds go to pay previous investors, creating a never-ending shuffling of money that eventually collapses.

Elder Joseph B. Wirthlin of the Quorum of the Twelve Apostles explained in a general conference address in 2004 that members sometimes get caught in notions of greed or selfishness that can lead to unwise and foolish financial practices.

“Brothers and sisters, beware of covetousness,” he said. “It is one of the great afflictions of these latter days. It creates greed and resentment. Often it leads to bondage, heartbreak, and crushing, grinding debt” (“Earthly Debts, Heavenly Debts,” Liahona, May 2004, 40).

Well-Known Referrals

Most individuals are more likely to participate in an investment opportunity if they know their sister, home teacher, neighbor, or co-worker is also participating. Promoters will often use these examples to appeal to and build some level of trust. While it may or may not be true that these friends and acquaintances are involved, investors cannot respon‑sibly respond to this elevated form of peer pressure.

“A lot of people don’t understand the proper principles of investments and don’t want to take the time to research and investigate something,” Brother Romney said. “Instead they rely on the fact that someone else has investigated it. When they hear the names of people they know, they automatically assume the research has been done.”

With a countless number of fraud schemes come just as many types of fraudsters. While terms such as swindler or scammer may bring a stereotypical image to mind, there are no set characteristics of someone promoting fraudulent investments. In fact, they may be typical acquaintances from work or church, family members, or close friends, and they may not even know the depth of what they are involved in.

“Ask yourself if you are interested solely because you know someone else involved,” Brother Romney said. “If this is the case, perhaps take a step back and really look into the background of the investment. No matter how trustworthy the source seems, potential investors should never make a decision based solely on the advice of others.”

Avoiding Fraud

As investment fraud becomes increasingly common, Church leaders have offered counsel to avoid unwise investments and stay out of debt.

“We again urge our people to avoid unnecessary debt, to be modest in the financial obligations which they undertake, to set aside some cash against an emergency,” said President Gordon B. Hinckley (1910–2008) in a general conference address in 2003. “We warn our people against ‘get rich’ schemes and other entanglements which are nearly always designed to trap the gullible” (“The Condition of the Church,” Liahona, May 2003, 4).

In February 2008 the First Presidency issued a letter to general and local leaders in the United States and Canada with a message to be prudent in managing financial affairs. They offered concern about individuals who may use relationships of trust to promote risky schemes and shared sound financial principles to manage risk: “First, avoid unnecessary debt, especially consumer debt; second, before investing, seek advice from a qualified and licensed financial advisor; and third, be wise.”

Resources exploring the basics of family finances are available on the Church’s Web site, ProvidentLiving.org. The site features an online financial course, references to talks from Church leaders, lesson materials, and access to additional resource material.

Church leaders have warned members to be wise in their investments.