If not adequately counteracted, such practices may damage the financial industry’s reputation. Furthermore, they can erode consumer confidence in the financial system, which is not favorable to our economy. Despite relentless efforts by the government to tackle such practices by taking down their websites, charging the perpetrators with crimes and improving financial literacy, more consumers continue to fall victim.

One piece of advice given to consumers is to apply the "legal and logical" test in investing. But unfortunately, even though product’s legality is important, it does not mean that the product is risk-free or harmless.  Meanwhile, standard of logic is not only subjective but also a function of the product’s yield and the risks associated with it.

It is not easy for consumers to assess whether to consider an offer sufficiently safe. It is equally difficult to determine if a product is suitable for them. However, the published cases reveal various modus operandi that are detrimental and demonstrate how the integrity of financial service providers is as important as the product’s legality.

The first disreputable method is offering illegal products that are managed by the providers in bad faith solely for their own benefit. One example is online gambling, which may appear in many forms as disguises. In trying to lure investors, the perpetrators sell dreams, from promises of high profits to lavish spending. Luxurious lifestyles are flaunted to portray a false impression that the too-good-to-be-true offer is true. Rotten from the core, these schemes are bound to bring misery to the victims.

The second are legitimate products that are misappropriated by managers. An example is a mutual fund case whereby the managers manage the fund not for the investors’ benefit but to commit capital market crimes, such as pump and dump schemes, insider trading or market manipulation. Even if the products themselves are legitimate, fund manipulation and capital market law violations can jeopardize the investors.

The third are legitimate products that are managed in accordance with the law, but with a twist. Gross misunderstandings occur between investors and providers. An example is a unit linked insurance case. The report shows disgruntled customers who were surprised to learn that their expectations were different from the reality. The dispute might have arisen either from a lack of information given to investors or because the investors’ risk profiles did not actually fit the product’s risk level.

Therefore, it takes more than applying the “legal and logical” test for consumers to keep safe from bad investments, which may cost them their entire life savings. Fortunately, there are red flags that consumers can spot and be alert to when reviewing an investment offer.

The most obvious one is an offer that provides a guaranteed profit. Different from products that naturally bear fixed interest rates like savings, deposits and bonds, the investment rate of return in market instruments cannot be ascertained. The yields from stocks and mutual funds, for example, fluctuate. They are determined by market price movement and the timing of when the securities are traded. Therefore, past yields or performance can only be used as indication and are not a guarantee of a future result.

It is true that high-profit products are not necessarily equivalent to troublesome products. Investing in digital bank stocks, for example, has lately rewarded investors with whopping returns because the price has shot up in a short period of time. However, if a product promises guaranteed high profits it can be a strong signal to cast serious doubt.

Another red flag can be found in product disclosures. Fraudsters and investment scam perpetrators tend to overwhelm investors with excessive information about handsome profits and exponential growth. Knowing that it will adversely influence investors’ decisions, they will deliberately omit the most crucial part, which is the magnitude of risk and potential loss.

Consumers know that they must examine risks and rewards prior to making investment decisions, but they must be informed about what those are and how the two variables are positively correlated. Two examples are mutual funds and unit linked insurance products. The principal protection and yield of both products are affected by, among other things, credit risk, market risk and liquidity risk.

Credit risk relates to the financial capacity of the investment managers and third parties to which a product has exposure. When these parties cannot fulfill their commitments, investors may suffer losses. Market risk relates to market performance. The investment value may fluctuate due to market volatility. Liquidity risk may arise when many investors want to resell their units at once. If the investment managers cannot provide sufficient cash, they might need to sell the underlying securities at a low price. This action will negatively impact the fund’s net asset value. Considering the gravity of such situation, a lack of risk disclosure is a noteworthy red flag.

Last but not least is licensing. It is not only about the provider’s status as a legal entity but also its business activities, products and marketing personnel. Permits must be obtained by companies prior to engaging in financial services. The strict requirements apply also to the products being marketed and the individual offering the products. The absence of any mandatory license is a strong signal to dismiss an investment offer.

As many other red flags might appear during the whole investment tenure, the ability to spot one will help investors in evaluating an offer, as well as reviewing their investment product performance. Hence, it all needs to be part of financial literacy materials for consumers. With improved literacy and continued support from all other stakeholders, the fight against malicious investment practices will be more effective.

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The writer is the head of the legal and corporate secretariat at Bank DBS Indonesia. The views expressed here are personal.