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Three Tips for New Investors

By Domanic Glenn of Shustak Reynolds & Partners, P.C. posted on Friday, January 24, 2020.

Investment opportunities come in all shapes and sizes – from traditional 401(k) contributions and Registered Investment Advisor (RIA) firms to hedge funds and venture capital start-ups. Any investment opportunity comes with its own specific set of legal challenges that may jeopardize both novice and seasoned investors alike. Anyone, however, can navigate the uncertain investment landscape and avoid costly legal pitfalls with input from financial professionals and experienced legal counsel.

First, many investors avoid seeking legal advice because they believe that it’s too expensive. While avoiding legal advice might save an investor some cash on the front end, it can ultimately cost more money on the back end. Most investment contracts contain page after page of complex legal language that can make it difficult to identify the exact terms of an investment agreement without industry-specific knowledge.  It is critical to unpack and understand any and all spotted areas of concern to avoid misinterpreting terms of agreement.

Second, confirm that the investment opportunity has been properly registered with the U.S. Securities and Exchange Commission (SEC) (if required) and complies with Financial Industry Regulatory Authority (FINRA) rules and regulations. Every year, numerous “accredited” financial investors and illegitimate schemes – yes, the Ponzi type - defraud investors of billions of dollars (see Woodbridge CEO Pleads Guilty to $1.3 Billion Fraud). Although an institution may be credible, certain advisors or unregistered persons may use common persuasion tactics to entice potential investors to make impulse decisions. FINRA describes such tactics as:

  • The “Phantom Riches” Tactic—dangling the prospect of wealth, enticing you with something you want but can't have. “These gas wells are guaranteed to produce $6,800 a month in income.”
  • The “Source Credibility” Tactic—trying to build credibility by claiming to be with a reputable firm or to have a special credential or experience. “Believe me, as a senior vice president of XYZ Firm, I would never sell an investment that doesn't produce.”
  • The “Social Consensus” Tactic—leading you to believe that other savvy investors have already invested. “This is how ___ got his start. I know it's a lot of money, but I'm in—and so is my mom and half her church—and it's worth every dime.”
  • The “Reciprocity” Tactic—offering to do a small favor for you in return for a big favor. “I'll give you a break on my commission if you buy now—half off.”
  • The “Scarcity” Tactic—creating a false sense of urgency by claiming limited supply. “There are only two units left, so I'd sign today if I were you.”

Third, understand that there is no guaranteed investment return and that any opportunity carries risks and potential downside. Even professionally vetted investment opportunities have the potential to produce disappointing results. This is yet another reason to seek the guidance of knowledgeable legal counsel when considering an investment.  

Shustak Reynolds & Partners, P.C. focuses its practice on securities and financial services law and complex business disputes. 
We represent many broker-dealers, registered representatives, investment advisors, investors and businesses. 
To speak with an attorney, contact us at (619) 696-9500.

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