The reputation of brokers is always hanging by a thread. With examples such as Bernie Madoff and Jordan Belfort discrediting the honest stock brokers whose job is to grow investments for investors, people now depict their morals to be elastic. But the question remains, should you trust them?
Stock brokers should be 100% legit, reliable, and trustworthy since you bet on them to grow your finances. But they are still salespeople. Their loyalty first goes to their employer, who compensates them with a commission. That being said, they do have a fiduciary duty towards their customers.
With a little research, you can avoid falling victim to untrustworthy brokers. But how do you find out if a broker is reliable? This article will help you learn more about how to find reliable brokers and how you can tell a stock broker fraud, and thereby protect your investments.
IMPORTANT SIDENOTE: I surveyed 1500+ traders to understand how social trading impacted their trading outcomes. The results shocked my belief system! Read my latest article: ‘Exploring Social Trading: Community, Profit, and Collaboration’ for my in-depth findings through the data collected from this survey!
Table of Contents
Are Stock Brokers Trustworthy?
The key selling point of a broker is convincing you to trust them with your money. They sell you a belief, and if you have faith in them, you purchase the financial products they recommend. But trust should not come quickly when dealing with a broker.
You should realize that your interests are not the same. Your goal may be to grow your financial pool for the long term, but theirs are short term; they are selling securities to make a living. It is to their advantage if they sell to you more products, especially the most expensive ones.
Rather than assuming that your broker will always act in your best interest, carefully analyze the products they are selling to you. Only buy securities that you need and always compare various options before deciding. Also, pay more consideration to the price.
As an investor, ensure that your relationship with the broker is strictly professional. When there are emotional attachments, you may be reluctant to assume that anything can go wrong. It becomes hard to make complaints or even challenge their performance since you may not want to hurt their feelings.
The best rule to maintain is to avoid dealing with a close relative or friend and ensure that the relationship is strictly professional. Work only with legitimate and licensed brokers.
Verifying the Legitimacy of a Stock Broker
Visit Independent Review Sites
Review sites provide you information about different kinds of businesses, and brokers are not left behind. The information is generated from the experiences of previous clients, painting an accurate picture of the broker.
Previous clients rate a broker to show their satisfaction level, and their rating is the average of all the reviews. Beware of brokers with lots of bad reviews and low ratings as it signals trouble.
Learn About Brokers From the Security Exchange Commission
The law requires brokers to register with the Security Exchange Commission (SEC). Once they do, details such as their educational background, filings, and disciplinary action were taken against them appear in the Central Registration Depository (CRD).
Therefore, it becomes very easy to learn more about the background of individual brokers. The information you get is accurate since brokers cannot manipulate the database.
Word of Mouth
A referral is one of the best methods to learn about a broker since you are getting information from people you know personally and trust.
It can either be your friends or family that either deal or have initially dealt with the broker. Therefore, the accuracy of the information you get about a broker is high since they do not want their reputation to take a hit.
Speak to the Broker
Face-to-face interaction with the broker allows you to ask all the critical questions before deciding to work with them.
You can learn whether they earn money from referral fees or through a commission of everything you make, whether they communicate through letters or call every month. Avoid dealing with brokers that are not transparent enough to answer all your questions.
Although answering all your questions may not guarantee their trustworthiness, you can learn if they are competent and honest, which are also equally important qualities to watch out for.
Stock Broker Loss vs. Stock Broker Fraud
There are plenty of honest stock brokers in the market that place the interest of their clients first. At the same time, some put their own financial interest first, violating your trust resulting in investment fraud.
Do not confuse investment loss and investment fraud. The stock market fluctuates all the time. As a result, a loss can occur during the investment process. You cannot claim such losses since brokers do not offer insurance against market risk.
You may also experience costly losses because of clerical errors made on the brokerage account. Such errors do not make up for investment fraud.
Investment fraud only occurs when the broker places their interest before yours. Some examples of stock broker fraud include:
Making Unsuitable Investments
Such investments can occur when a broker pressures you to invest in high-risk securities you do not understand. Before a stock broker recommends an investment, they should consider your risk tolerance, investment experience, financial needs, income level, and goals.
Recommending an investment unsuitable to your specific situation accounts for fraud.
Misrepresenting or Omitting Facts
It involves stock brokers providing you with misleading information or withholding facts that can affect the overall investment. Such facts may include risks, liquidity, or the amount of compensation they will receive.
There should be a reasonable basis for all investment recommendations. The broker should also provide you with all the information relevant to the investment.
Overconcentration
It occurs when a broker places most of your money on one or two types of securities resulting in excessive losses. For example, the broker may choose to buy too much stock from one company.
The solution to such a problem is diversifying your portfolio. Invest in various industries and over one type of stock.
Here is a video that explains what overconcentration is:
Unauthorized Trading
It occurs when a broker uses your account to make purchases of securities you did not give consent to. A broker should only make transactions on your behalf if you issue them with discretionary authority or if they get your approval before each transaction they make.
Even with the autonomous trading authority, the broker has to make trades that are suitable for you based on your financial position and goals. When the broker makes inappropriate trades with the free rein given, then it makes up fraud.
Churning
Churning occurs when a broker uses your account to engage in the excessive buying and selling of securities to benefit from more commissions.
Often, brokers hide churning by marking the account’s investment aim as high or aggressive risk tolerance. After trading excessively with the account, they often argue that you were willing to take risks.
But churning is unsuitable for anyone regardless of their financial objectives. The process is not only fraud but also illegal and unethical.
If you find that your stock broker is churning your account, you can find evidence from the account statements.
Author’s Recommendations: Top Trading and Investment Resources To Consider
Before concluding this article, I wanted to share few trading and investment resources that I have vetted, with the help of 50+ consistently profitable traders, for you. I am confident that you will greatly benefit in your trading journey by considering one or more of these resources.
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- Best Broker For Trading Success: I reviewed 15+ brokers and discussed my findings with 50+ consistently profitable traders. Post all that assessment, the best all round broker that our collective minds picked was M1 Finance. If you are looking to open a brokerage account, choose M1 Finance. You just cannot go wrong with it! Click Here To Sign Up for M1 Finance Today!
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Conclusion
If you want to invest in a stock brokerage account, the first step is finding a trustworthy broker. The easiest and most reliable way is through word of mouth. Still, you can also consider some different ways listed above.
But the real question is, should you trust them? Trust is essential when dealing with a broker. But rather than just following their recommendations blindly, be questionable of every detail and investigate before committing your money. When dealing with expensive financial products, be open to rejecting the offer.
BEFORE YOU GO: Don’t forget to check out my latest article – ‘Exploring Social Trading: Community, Profit, and Collaboration’. I surveyed 1500+ traders to identify the impact social trading can have on your trading performance, and shared all my findings in this article. No matter where you are in your trading journey today, I am confident that you will find this article helpful!
Affiliate Disclosure: We participate in several affiliate programs and may be compensated if you make a purchase using our referral link, at no additional cost to you. You can, however, trust the integrity of our recommendation. Affiliate programs exist even for products that we are not recommending. We only choose to recommend you the products that we actually believe in.
