Subscribe to Newsletter
February 15, 2022
Christopher Rand, PhD, CFP®, CLU® is a recent graduate of the Doctor of Philosophy program of The American College of Financial Services. He is a Managing Partner and Personal CFO with FIDES Wealth Strategies Group and The Wealth Consulting Group. Here, he speaks with Domarina Oshana, PhD, Director of Research and Operations at the American College Cary M. Maguire Center for Ethics in Financial Services, about his dissertation research on investment fraud vulnerability and the impact of investor knowledge and confidence. His research suggests that traditional financial literacy education requires modification – it needs to be fraud-specific.
DOMARINA OSHANA: Tell us about your dissertation. What makes you so passionate about researching investor fraud vulnerability, and why did you put your stake in this particular topic?
CHRISTOPHER RAND: Having been a financial planner for over 25 years, I have unfortunately witnessed way too many cases of fraud and attempted fraud. Whether the fraud is a huge pyramid scheme like the Bernie Madoff Ponzi affair, a telemarketer overseas who swindles a senior citizen out of their retirement account, or a family member looking to take advantage of their parents, investors need to be protected. Financial planners may spend much of their career helping a family plan for and save up a nice retirement nest egg, only to see it destroyed by unscrupulous actors. While it is common to focus on the financial loss victims of fraud experience, we often forget the emotional toll on a fraud victim. They may experience feelings from discouragement to depression over being victimized. While it may not be possible to eliminate all fraud risk for an individual, it is possible to reduce their susceptibility to being a fraud victim. Investigating ways to make an individual’s financial plan more secure through reducing fraud risk vulnerability is where my interest came from.
DO: What impact do you anticipate your dissertation will have in the financial services industry and/or the field of financial and retirement planning? In what ways do you think it might inform ethical behavior and/or encourage dialogue on ethics in fraud prevention?
CR: This research informs investors and professionals about some of the risks individuals face as it relates to investment fraud vulnerability. The topic of fraud has become more common in trade publications, helping increase advisor awareness. There also seems to be an increase in training by firms on what advisors need to watch out for on topics from elder abuse to email and wire fraud.
While training and education may be an important tool to reduce fraud vulnerability, the topics taught should be fraud-specific. It is not enough to increase an individual’s education level about investing—the new knowledge should include specific ways to identify and prevent fraud. My research revealed a surprising finding: knowledgeable investors, as well as overconfident investors, tend to have an elevated vulnerability to investment fraud risk through exhibiting behaviors and attitudes common in fraud victims. The research defined a knowledgeable investor as an individual who scored better than average on a 10-question investment quiz, and an overconfident investor as someone whose confidence level in their abilities was above average but scored below average on the same quiz. Employees and advisors in financial services likely have a higher financial knowledge than those outside of the financial services industry, yet that knowledge may not be enough to detect and deter fraud for their clients.
The advisor-client relationship is many times centered around trust as the advisor strives to handle the relationship with honesty and transparency. That trusting relationship may place an overconfident investor at a higher degree of risk if an unethical advisor was to mishandle that trust. The overconfident investor may be more likely to overlook items and less likely to do their research. Advisors can be transparent with these vulnerable investors about ways clients can protect themselves from fraud, like using a third-party custodian to hold client assets and being truthful about their work experience and credentials.
DO: In your dissertation, you found elevated investment fraud risk for knowledgeable investors is suggestive that traditional financial literacy requires modification to include information about fraud risks. How can advisors best communicate and educate investors about fraud prevention and awareness?
CR: Just because an investor is knowledgeable, you cannot assume they are at a lower risk for fraud. Knowledgeable investors may be at an even higher risk if they believe their knowledge level to be adequate and ignore fraud signals, which they may have paid attention to had they possessed a lower level of confidence.
People learn differently, so it’s best to communicate with the client through the best medium for them and bring up the fraud topic frequently. Overconfident investors are also at a higher risk of fraud vulnerability, and do not likely know they are overconfident. Advisors and employees of firms may be aware of their client’s overconfidence and, armed with the knowledge that the overconfident investor is more vulnerable, they may be able to act as their guardian and help protect their assets held at the firm. The research found overconfident investors to have a high level of confidence in the effectiveness of U.S. financial market regulation and to have a high level of comfort in making investment decisions. These two attitudes indicate an overconfident investor will assume regulation is there to protect them, make their investment decision, and move on. Advisors and firm employees should be on the lookout for attempted fraud, like an email solicitation for money that came from a fraudster, as opposed to the overconfident client.
DO: How do you explain your dissertation to someone not in your discipline? Why does it matter, and what is the key takeaway you would like to impress upon them?
CR: Investment fraud continues to rise, and all investors are at risk. Simply increasing your investment fraud knowledge is not sufficient to reduce your vulnerability to investment fraud. Obtaining fraud-specific education is a must to help protect yourself and reduce your vulnerability. Fraudsters will continue to find new and innovative ways to separate you from your hard-saved money. Take the time to educate yourself and keep up with the latest and most pervasive fraud techniques.
DO: What plans do you have for future research and/or education in fraud prevention and awareness?
CR: Fraud research continues to be limited. A primary research project focused on actual incidents of fraud would be a great way to build on this research and could explore additional attitudes and behaviors that may be common in those victims. That knowledge could provide additional evidence about the impact knowledge and investor confidence has on someone’s investment fraud vulnerability. I hope to publish my findings in a peer-reviewed journal and plan to make myself available to the media to help get the word out about investment fraud vulnerability. I have a unique background that may be of interest to the media now that I have completed the PhD I have taught financial planning courses at U.C. Berkeley and San Diego State University and have over 25 years of experience working as a financial planner. That unique background may pique consumer media interest and help provide the platform needed to discuss investment fraud vulnerabilities.
DO: How has The American College of Financial Services prepared you to help individuals and companies be more sensitive to ethical issues and think more critically about solutions for the benefit of society?
CR: The process of obtaining a PhD from The College changed how I approach challenges. I think more critically when working on projects, challenging things I assume to be true. Historically, I may have quickly researched an item with maybe one source, whereas now I will typically use multiple sources to confirm if my understanding is accurate.