When you entrust the the management of your investment portfolio to a broker, that’s a big deal. If you are going to ask someone to assist you in managing your financial future, you are going to want to know that they have your best investment interests at heart. The relationship between you and your broker should be entirely founded on trust, honesty and transparency. And for many broker/investor relationships, that is true.
Unfortunately, we find that isn’t always the case.
Obviously, selecting a broker is no simple task; you don’t just pick a name out of the phone book and go with them. Finding the right broker takes research and due diligence. You want to know that your broker is properly registered and in good standing.
However, even with proper vetting there are still unscrupulous individuals who slip under the radar. Sometimes, it can even be a case of good-broker-gone-bad.
Common Cases of Broker Misconduct
Investment fraud and broker misconduct can come in a variety of forms. From the blatant to the well-concealed, here are some common cases of when brokers aren’t looking out for your best investment interests.
One of the most pervasive issues plaguing the investment industry, excessive trading can be tough to cap. Since most brokers earn a commission on trades and transactions, they may be tempted to take frequent or unnecessary action with your accounts. This process, also called churning, is one of the biggest problems for securities regulators. Churning can come in several forms: unauthorized trades, frequent trading, and excessive fees.
This is where it becomes important for you to take an active role in your account management. Review any account statements and trade confirmations. Look for red flags and if something doesn’t look right, talk to your broker right away.
Broker Selling Unauthorized Investments
Just because your broker is licensed with a registered firm doesn’t necessarily mean they’re selling you authorized investments.
The Securities and Exchange Commission (SEC) has noticed a trend on the rise of brokers operating unauthorized “side-businesses” outside of their registered brokerage firms. Often times, a broker may attempt to pass off these outside products as coming from within the firm. Other times, they may try to deflect or conceal source offering.
The SEC warns investors to look out for the following red flags regarding unauthorized investment offerings:
- Your broker requests a check or money order in payment to an outside entity or different firm
- Your broker tries to sell you an investment without providing any upfront paperwork
- Deposits and/or transactions regarding you investment do not appear on your account statements
- You receive a statement from a different firm regarding your investment
So how can you tell if your broker is keeping your best investment interests in mind?
Well, there are definitely some clues you can look for when vetting a potential broker to try and mitigate that risk ahead of time. But there are also some early-warning signs and sure-fire red flags for which you can monitor.
The key thing is that you need to take some sort of hands-on approach to your financial planning. The margin for potential broker misconduct just becomes too great if you aren’t holding the reigns on investment decisions.
Don’t get left in the dark about your investment decisions. You have every right to make sure that your broker is pursuing your investment interests exactly according to your financial plans.
Here are some tips and advice to make sure that:
- You find a broker-dealer/firm that you feel confident you can trust
- Your broker-dealer is always keeping your investment interests in mind
Finding the Right Broker
Knowing that your broker-dealer is looking out for your investment future starts with knowing your broker. Here’s some things to ask when choosing a broker to make sure you find the right one.
Make sure they’re licensed
Always make sure your broker is properly licensed and in good standing as a financial professional. You can do an easy online search of registered and licensed broker-dealers here.
Be clear with your investment goals
When vetting potential brokers, be clear about your financial plan. Make them aware of your goals and discuss the services and products needed to meet those goals. Make sure that your broker can provide these services and products.
Understand your cost-breakdowns and service fees
When choosing a financial professional, it’s helpful to understand how they get paid. When talking with potential brokers, make sure you discuss costs for the services and products you need. Find out how these costs are broken down and make sure you understand how your broker’s fees get paid.
Know Your Broker
Sometimes — especially when it comes to brokerage fees — vetting financial professionals can be uncomfortable. It can feel awkward to approach the subject of how one gets paid. Other times, it may be intimidating to meet with financial professionals. First-time or novice investors may be nervous about asking the wrong questions or appearing dumb.
However, you need to remember that your broker is there to work for you. It is there job to make the right decisions for your investments. It’s natural for a broker to know more about financial investing than you – that’s what they are there for. But it’s your job to find out who your broker is.
While it may feel awkward, selecting the right broker is a personal process and you shouldn’t feel bashful or intimidated. Often, it is best to ask direct questions. This is the best way to establish open dialogue with potential candidates.
Protecting Your Investment Interests
If you think your broker is not keeping your best investment interests in mind, action you can take is to ask questions. Don’t feel intimidated about asking if you see something on your account that looks unfamiliar or you don’t understand. If you don’t trust the answer your broker is giving you, ask your broker’s firm. The firm’s compliance department will be able to answer any questions that your broker is unable — or unwilling — to answer.
If you believe you have suffered an investment loss due to broker misconduct or securities fraud, contact our team. We can go over the details of your claim and explore loss-recovery options.