Following the Federal Reserve's announcement that interest rates are expected to remain at exceptionally low levels until at least late 2014, the Texas State Securities Board cautions investors to beware of risky or outright fraudulent investments promising higher yield or returns.
"Investors who are frustrated with the low yields on fixed income products and reach for a higher return can expose themselves to significant risks," said John Morgan, Texas Securities Commissioner. "Many fraud cases start with an investment that promises high returns with very little or no risk - combinations that simply do not exist."
Morgan said one concern is that individuals who depend on fixed income investments, particularly seniors, may be tempted to move money from their slower growing but safe investments into alternative investments without understanding the risks and terms.
All investments carry a degree of risk. The level of risk usually is related to the return that investors can expect to receive. Investments with higher yields typically carry a higher risk to investors; the lower the risk, the lower the expected yield or return.
Yield-starved investors may be more easily enticed into fraudulent schemes that are offered as promissory notes, securitized life settlement contracts, private placements, and investments in energy and distressed real estate, all of which are on the State Securities Board's current list of Top Investor Traps. Before purchasing any investment, the State Securities Board reminds investors to ask the following questions:
- Are claims made for the investment realistic? Consider the risk inherent in an investment that promises to pay a safe and secure 10% a year when the rate of return on a one-year, federally insured certificated of deposit is less than 1%.
- Has the seller given you written information that fully explains the investment? You should request written information that fully explains the investment, such as a prospectus or offering circular. The documentation should contain enough clear and accurate information to allow you to evaluate and verify the particulars of the investment.
- Are the individuals and firms registered in the State of Texas? If they are not, they may be operating illegally. For more information, contact the State Securities Board at 1-888-663-0009 or visit us at www.ssb.texas.gov.