Navigating Fintech and Financial Fraud

I recently attended a webinar about investment fraud sponsored by OneOp. The speakers were from the U.S. Securities and Exchange Commission (SEC). Below are six key take-aways:

FinTech Platforms-Financial technology (FinTech) is increasingly being used for banking, lending, bill payments, and wealth management. Investment advisory platforms typically include an initial assessment through an online questionnaire (e.g., goals, age), automated portfolio recommendations, and automated management. Fees/commissions vary widely among providers. SEC-registered platforms are subject to examinations and enforcement and have SIPC insurance against insolvency.

 

Online Gambling- Research suggests money spent on online sports betting overwhelmingly comes from money that was previously spent on more stable, long-term investments like retirement savings accounts. One study found that bettors spent, on average, $1,100 per year on online bets. For every dollar spent on betting, bettors put $2 fewer into investments. The study author (Scott Baker, Northwestern University) concluded “Bettors are looking for the big win at the expense of savings.”

 

Modern Twists on Old Scams- Fraudulent individuals or public companies may use the promise of artificial intelligence (AI) and emerging technologies to lure investors. Bad actors love to use the latest trends or events to promote outright frauds. Watch out for heavily promoted microcap stocks that may be the focal point of a “pump and dump” scam. Also beware of messages claiming to come from companies and government agencies. AI makes it easy to clone voices and make fake videos.

 

Advantages of Diversification- Diversification can lower the risk of investing. If a single company or sector loses value, exposure to other investments may limit their losses. Broadly diversified, low fee index mutual funds or exchange-traded funds and target date funds are easy ways to achieve diversification. For example, the Standard & Poor’s 500 index tracks the 500 largest U.S. publicly traded companies and total stock market funds offer even broader diversification.

 

Market Timing- Market timing (i.e., moving money in and out of the stock market to try to track high and low prices) is difficult and expensive. A Library of Congress study found that active traders are more likely to underperform the market. In addition, frequent traders typically pay higher taxes than investors with long term “buy and hold” investments. The best and worst days in the stock market tend to happen close together.

 

Account Protection- The SEC offered the following advice to protect online accounts from fraud: pick strong passwords and keep them secure, use multi-factor authentication (e.g., texted or e-mailed codes) or biometric safeguards (e.g., facial characteristics, fingerprints, retinas, and voices), and turn on account alerts. Also, avoid using public wifi for online access, be careful clicking on links, and beware of relationship scams and affinity fraud scams that target specific groups.

 

For additional information about investing and investment fraud, visit www.investor.gov.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.