Financial advisors encourage investors to believe in them, building relationships with investors and relying on a foundation of trust and confidence to conduct business. Sadly, there will always be brokers who abuse this trust and use the broker-investor relationship to their own ends. Brokers and brokerage firms often claim they act in the best interests of their investors when, in reality, they may convince investors to purchase investments and securities with incomplete, deficient or misleading information or investments which are not appropriate for their clients.
Though the National Association of Securities Dealers (NASD) and the Securities and Exchange Commission (SEC) do a fairly good job regulating and policing brokers, it is still very necessary for investors to make a thorough background check of a brokerage firm before trusting it with the money they want to invest.
Below are some of the most unscrupulous practices brokers have resorted to, to boost their commissions.
- Unsuitable Investments – It is required of stock brokers always act in ways that will benefit their clients, thus, they ought to learn about their investor’s risk tolerance, financial needs and investment goals, before ever recommending an investment that is suitable to their specific situation. Anything less runs the risk of fraud.
- Misrepresenting or Omitting Facts – Stock broker misrepresentation happens when a stock broker provides misleading information or withholds material facts that would impact an investment decision. Acts of misrepresentation include failure to adequately disclose sales-related compensation, liquidity, risks, or any other material facts. Rather than a fraudulent act, however, a stock broker giving an honest investment recommendation that eventually turns out worthless may just be considered incompetence.
- Over-concentration – Diversifying your stock portfolio in various types of stock and industries is one way to reduce risk of investment losses. If a broker, however, invests your money or tells you to invest your money in just one type of security or market sector, then you may be a victim of your stock broker over-concentrating your investment portfolio.
- Unauthorized Trading – A stock broker can only make a purchase in your account with your expressed consent? The only two conditions under which your broker can transact on your behalf are, first, if you granted him discretionary authority and, second, if you gave him/her your expressed and detailed permission. Anything less can be an act of fraud.
- Churning – If your stock broker has control of your account and he/she buys or sells the same stock multiple times, or commits excessive trading in an effort to pursue quick profits, then churning , another form of investment fraud, may have occurred. Remember that brokers who are paid by commission get more money or commission if they make more transactions.
When a broker fails to live up to his/her professional duties, civil law presents a resolution for victims. Your broker may have put your money in risky investments, ignored your instructions, committed retirement investment fraud, or otherwise abused your trust. If this sounds familiar, you may have the opportunity to get some or all of your money back.