Your wealth is too important to entrust to just anyone. So how can you really make sure that the people you’re working with are who they say they are?
The easy answer is to take time and do your research, but that advice is not particularly helpful unless you know what to look for. So, before you commit money to a new investment opportunity, make sure you’re considering these five things.
1. Beware of Guarantees or “Sure Things”
No matter how strong or low risk an investment might seem, there is no such thing as a sure thing. Every investment involves some level of risk, and anyone who tries to tell you differently is lying.
If someone tries to sell you on an investment by telling you “it’s a sure thing,” or they don’t acknowledge risk at all, then they are either too inexperienced to make smart investment decisions or are intentionally misleading you.
Look instead for investment opportunities where risk is acknowledged, along with a clear and comprehensive plan for mitigating that risk as much as possible.
2. Make Sure You Understand the Benefits Being Promoted
One of the ways some investment advisors and partners make money is by advertising benefits that don’t necessarily apply to the average investor. They’re banking on the fact that many people will be enticed by tax incentives or other “perks,” even if they don’t fully understand them.
Because of this, it’s important to make sure you fully understand the actual benefits of an investment, and whether or not those benefits will apply to your specific situation.
Here’s a common example: You’ve probably seen social media posts or heard podcast interviews where a professional real estate investor talks about how purchasing real estate has allowed them to pay less income tax. This may very well be true, but for the vast majority of investors, real estate will not lower your income tax.
One of the most common ways for real estate investments to actually lower your earned, W-2 income tax is if you are classified by the IRS as a real estate professional. You would need to spend more than half of your time working in real estate — as well as spending more than 750 hours a year — and materially participate in each real estate transaction you work on.
3. Watch Out for Common Red Flags
The more time you spend in the investment space, the more you’ll come to recognize certain warning signs that crop up over and over again. But when you’re new to investing, you may not know to look out for these things.
Some of the most common red flags to watch out for include:
- Not verifying your accreditation status
- Offering blanket advice that doesn’t match your goals
- Focusing only on short-term returns
- Not prioritizing tax efficiency
These red flags don’t always indicate a scam, but they do suggest that the investment partner may not be as experienced as they claim, or that they don’t have your best interests at heart.
4. Know the Exit Strategy
When exploring a new investment, it’s always important to get clear answers about distribution timelines, exit strategies, and liquidity.
Investments can vary wildly in the amount of time they require you to commit your money for, the length of time between your initial investment and your first returns, and the overall exit strategy.
Any advisor or partner who cannot provide clear and confident answers to your questions about exit strategies is not someone you should invest your money with.
5. Look for Documentation
You should never invest with someone who markets an opportunity based on “secret information.” This is a major red flag for possible illegal activities like insider trading.
However, many warning signs are much more subtle. If you don’t take the time to carefully review the documented terms of an investment, you could miss something important. Make sure that any opportunity you invest in is outlined with clear and comprehensive documentation, and double check that the information in official paperwork does not contradict information you were told previously.
This is important not only for protecting your money, but also for making sure you aren’t unknowingly participating in illegal activities.
Invest with a Partner You Can Trust
At FGCP™, we work hard to provide our clients with all the information they need, when they need it. You don’t have to worry about giving us your money and then never hearing from us until the first returns show up; we understand that investing is a partnership, and we want to support you for the long haul.
If you’re interested in learning more, please fill out this brief form to get in touch.