Who Can You Trust? “Affinity Fraud” Examined

By Patrick Stark, CFP®

“Hey, I need some advice on how to invest $100 million. Can you help me?”

It was a question posed to me in almost a whisper, with the person looking around furtively to make sure that no one could overhear our conversation. “I’m going to have the money soon and I want to be ready.”

It’s not a question that I get every day. It was posed to me a few years ago by a servicemember who had recently returned from an overseas deployment. He had “invested” $4,000 in the currency of the war-torn country where he had been deployed. He had heard that when the country was rebuilt the foreign currency would be “revalued” and his $4,000 investment would be worth over $100 million. He told me that his fellow servicemembers had made similar purchases.

If a total stranger approached you with such a proposition you’d most likely ignore it. However, if it was a friend, family member, or co-worker, you’d stop and think about it. After all, we tend to trust people who we know and who share common values and interests.

“Affinity fraud” refers to investment scams that target identifiable groups – such as religious or ethnic communities, the elderly, the military, or professional groups. These scams exploit the trust and friendship that exist in groups of people who have something in common. Fraudsters either pretend to be or actually are members of the group. They try to convince respected leaders of the group that the investment is legitimate and get them to spread the word about it.

These “low risk, high return” investment opportunities generally fall into two categories:

  • Outright fraud
  • Legitimate investments where the fees and risks aren’t fully disclosed

Outright fraud is usually a Ponzi or pyramid scheme, where money coming in from new investors is used to pay earlier investors. This gives the illusion that the investment is safe and legitimate, but it eventually collapses when the supply of investor money inevitably dries up.

It’s possible that the investment opportunity is legitimate; however, crucial details of the investment (typically, high fees and high risk) aren’t being disclosed in a transparent way. While not technically fraud, unsuitable investments can cause great damage to someone’s financial life.

How can you avoid falling for an investment that’s “too good to be true”?

1) Check out the source.

Use independent information to evaluate investment opportunities. Never make an investment based solely on the recommendation of a member of an organization, religious group, or ethnic group to which you belong. If the investment is being offered by an investment professional, check out their background and disciplinary history using one of the following websites:



2) Research the investment.

A legitimate opportunity will have a document that describes the investment; however, these documents can be dozens or even hundreds of pages long. Do a word search using “fees”, “expenses”, and “risks” to jump to the important areas. Be skeptical of any investment that’s not in writing.

3) Recognize that there’s no such thing as a “low risk, high return” investment.

Remember, risk and return are inextricably linked. If an investment is safe, it will have a low return. The greater the potential return from an investment, the greater your risk of losing money.

4) Don’t be pressured into buying.

Be wary of investments that require a fast decision. A false sense of urgency is a common tactic with fraudsters and overly aggressive marketers. “Nobody’s aware of this great deal right now. Buy now before everyone else finds out about it.”

5) Be skeptical of claims made on social media.

Social media is a popular place to promote investments because it takes little effort to reach a large number of people.

So what happened with the foreign currency “investment”? I told the servicemember that this was a long-running scam and that he shouldn’t expect his money back, much less reap millions of dollars in profits. But he wasn’t really convinced and is still hoping for a great windfall someday.

Want to learn more? Have you seen something similar? Give us a call.