Posted by Mark Pugsley.

Utah Division of Securities has just released a list of the “Top Ten Investor Traps” and I have some observations about it. First of all, here is the list:

  • Exchange-traded funds
  • Foreign exchange trading schemes
  • Gold and precious metals
  • Green schemes
  • Life settlement investments
  • Oil and gas schemes
  • Affinity fraud
  • Undisclosed conflicts of interest
  • Private or special deals
  • “Off the book” deals

The press coverage surrounding this list makes it sound like these are all types of investment scams, but clearly they are not. Is the Division intending to imply that an “investment trap” the same as an “investment scam”? Who knows, but I hope not.

The name of the list is seriously misleading because although they can be problematic in some cases many of the items listed are legitimate investment products. For instance, I’m not sure why they want to scare investors away from ETFs or Exchange-Traded Funds. There are many many different types of ETFs and many of them are perfectly suitable for all types of investors. This is like saying all mutual funds are bad, or that stocks are a”trap.”

It’s certainly true that people should invest in products that are “suitable” or appropriate for their individual risk tolerance and financial circumstances, but what is appropriate varies dramatically from person to person, and there are many conservative ETFs. That’s why its important to work through a licensed stock broker or investment advisor to determine what is appropriate. Keith Woodwell tried to explain why ETFs are on the list this year, but I think the press release should have included a better explanation too.

And why is “gold and precious metals” on there? These are not always volatile or a “trap”, and in fact gold has been one of the best investments around for the last few years.

And do we want to scare people away from investing in environmentally friendly companies? Certainly not all “green” investments are a trap; there are many good well-diversified mutual funds that focus on green technology. Just because there are some scams out there in this area doesn’t justify including it on the list. Just about every popular investment out there has somebody turning into a scam, and I think this list could potentially scare people away from legitimate investment opportunities.

I have represented life settlement or “viatical” companies and although I agree that they “deserve careful scrutiny” they are 100% legal and if structured correctly and sold by a licensed broker they are not particularly risky. I don’t see why you would want to lump those in with affinity fraud and foreign exchange trading.

Oil and gas investments are also not always problematic either. The Dow is filled with oil and gas company stocks and most of the big ones are considered “blue chip” quality investments, although BP isn’t so hot anymore…

I appreciate that the Division is attempting to educate the public and particularly seniors about investment risks, but I think it’s disingenuous to include investments that are legal and often very safe on a list of “traps” that also includes scams.

© 2010 Mark W. Pugsley, all rights reserved.

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