Stock Broker Fraud – What You Must Know
Reveals The 11 Tell-Tale Signs Of Stock Broker Fraud And What You Can Do To Protect Your Investments
Key Ideas
- How to tell the difference between stock broker fraud and normal investment losses.
- Discover the 11 shocking investment frauds stock brokers make.
- The difference between gross incompetence and intentional stock broker fraud.
- Learn the exact preventative steps you need to keep your wealth safe.
You assume a stock broker is a fiduciary that represents your best interests at all times.
His job should be to make your money earn more money, and he should earn a fair fee for that service.
Unfortunately, there are time when stock brokers put their financial interests before yours, violating that sacred trust and creating an opportunity for investment fraud.
We're not alarmist here at Financial Mentor. Most stock brokers and financial advisors are honest, hard working people. They do their level best to offer you a legitimate service with the limited knowledge and resources they possess.
However, there’s also a small, but ever-present contingent of fraudulent stock brokers that are drawn to the investment business because of the large dollars involved.
Related: How Your Financial Advisor is Taking 75% of Your Retirement Income (or More!) Video, PDF download, or Audio.
The unfortunate reality is investors are defrauded every day by their stock brokers. Don't become the next victim. Here’s what you need to watch out for.
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Normal Investment Losses vs. Stock Broker Fraud
Before getting into the details of detecting stock broker fraud, it’s important to distinguish between normal investment losses and stock broker fraud.
Just because your investments lose money doesn’t necessarily mean you’re a victim of stock broker fraud. The markets fluctuate, and some losses are a natural and normal part of the investment process. Stock brokers don't insure you against market risk.
Additionally, there may be costly mistakes in your stock brokerage account that aren't fraud, but simply clerical errors. These can easily be corrected when pointed out. This isn't an example of investment fraud or stock broker fraud – just a business boo-boo.
“Where there is a sea, there are pirates.”– Proverb
Beyond the realm of normal investment losses and business mistakes lay situations that cross ethical standards – where brokers place their interests in front of yours. That’s the key distinction.
When a stock broker puts his financial interests before yours, you’ve entered the world of stock broker fraud. Below are the most common types of stock broker fraud you need to know.
11 Types of Stock Broker Fraud
- Unsuitable Investments: Are you a widow or an orphan who was sold a portfolio of high risk stocks? Were you pressured to invest in securities you didn't understand, or did you trade on margin without knowing the added risks? If so, you may be the victim of a stock broker recommending unsuitable investments, which can be fraud.
A stock broker is required to learn about your risk tolerance, income, investment experience, other assets, financial needs, and investment goals, before ever recommending an investment. Based upon that information, your stock broker is obligated to only recommend investments suitable to your specific situation. Anything less runs the risk of fraud. - Misrepresenting or Omitting Facts: Stock broker misrepresentation occurs when misleading information is provided, or material facts are withheld, that impact the investment decision. This can include not adequately disclosing sales-related compensation, risks, liquidity, or any other material facts. All investment recommendations must have a reasonable basis in fact, and all relevant information to the investment decision must be disclosed.
If a stock broker gives an honest investment recommendation that turns out lousy, you aren't necessarily a victim of fraud. It's more likely just incompetence. However, if your broker suggests he has “inside information” or misleads you regarding the potential risks or rewards of an investment, then you may be a victim of fraud. - Over-concentration: Did excessive losses in your portfolio result from most or all of your money being invested in one type of security or market sector, such as technology? If so, you may be a victim of your stock broker concentrating your investment portfolio, rather than diversifying.
A proven method for risk reduction is to diversify your stock portfolio across various types of stock and industry sectors, while also balancing equities with other investment classes such as bonds, real estate, commodities, etc. If a stock broker puts too much of your money in one or two different stocks, or buys too many stocks in the same industry, it can be a form of investment fraud.
“The secret of life is honesty and fair dealing. If you can fake that, you've got it made.” – Groucho Marx
- Unauthorized Trading: Has your stock broker ever made a purchase for your account that you didn’t agree to in advance? There are only two conditions under which a broker can transact on your behalf. The first is if he's granted discretionary authority, and the second is when you give him expressed and detailed permission. Anything less is possibly investment fraud.
- Churning: Has there been excessive trading in your account in an effort to pursue quick profits? Has the same stock been bought and sold multiple times? If your stock broker was in control of your account, then churning may have occurred. This is another form of investment fraud.
If your stock broker is paid by commission, then he has an incentive to increase transaction frequency regardless of what’s in your best interests. The more transactions, the more money he makes. If your stock broker has discretionary authority over your investment account, then you must monitor trading activity closely to determine if you’re a fraud victim.
- Timely Execution: Has your stock broker ever failed to execute your investment orders? He is required, by law, to promptly execute all your orders and cannot ever refuse an order. Anything less can be fraud.
- Inappropriate Mutual Fund and Variable Annuity Sales: Just as a stock broker can fraudulently churn stocks in your account, a broker may also switch between mutual funds with excessive frequency for no valid reason except to earn commissions. Another form of mutual fund sales abuse is selling various forms of loaded funds or Class B shares to clients who might qualify for Class A shares, or be equally served by no load equivalents. Finally, variable annuity sales abuse is so widespread and complicated that an entire article is devoted to that subject on this website (see Variable Annuity Investment Fraud).
“A thing worth having is a thing worth cheating for.”– W.C. Fields
- Illegal Accounts: Has your stock broker ever recommended using an address other than your home or businesses, or suggested lying on an investment account application? Placing client money in a stock broker's own investment account, or setting up false accounts, is another example of potential stock broker fraud.
- Unlicensed or Unregistered: All brokerage firms, investment advisors, stock brokers, and other euphemisms for investment product salespeople must be registered to sell securities. Additionally, every security product sold must be registered according to state and federal guidelines.
- Other Fraudulent Activity: No funds may be withdrawn from a customer's account without prior, written authorization. Additionally, any request for delivery of securities or liquid funds in an account must be completed within a reasonable time period. Other activities such as forgery, selling securities that don't exist, and misappropriation of funds are all examples of potential stock broker fraud.
Should You Work With A Financial Advisor?
Do-it-yourself investing isn’t for everybody. Although you save yourself the cost of a financial advisor, you take complete responsibility for your financial future. One mistake could mean the difference between retiring in comfort and living with the anxiety that you may outlive your money.
Did you know that a 2016 study by Vanguard Research found that working with a financial advisor can increase your income in retirement by 3%? The numbers speak for themselves, but they aren’t even the most important reason to consider hiring an advisor. Investors who work with financial advisors report greater confidence, clarity, and peace of mind than do-it-yourselfers.
If you’re thinking about interviewing some prospective advisors, this new free tool will match you with highly-vetted local fiduciary investment advisors after a brief questionnaire.
“It turns out that an eerie type of chaos can lurk just behind a façade of order – and yet, deep inside the chaos lurks an even eerier type of order.”– Douglas Hostadter
- Institutionalized Brokerage Fraud: It’s misrepresentation to tout an investment recommendation as objective when the only reason for the favorable opinion is an undisclosed back-door payment. (This was common in the late 1990's with internet stocks.) Several large brokerage houses have been prosecuted over the years for using their sales force (stock brokers) to peddle undesirable stocks in an effort to attract and retain lucrative investment banking relationships. It’s also fraudulent when a brokerage firm sells IPO stocks (i.e.: hot issues) to favored clients and business relationships before the release date.
Stock Broker Fraud Summary
All forms of stock broker fraud violate the fiduciary responsibility of the broker to the investor. The key principle is the broker placing his interests in front of the investor's best interests.
Stock brokers are governed by strict rules of conduct. If you believe you've been victimized by fraud, contact your state securities regulator and/or the Securities and Exchange Commission to report any potential wrongdoings.
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If you invest, then it’s a near certainty you’ll encounter investment fraud. Nobody is immune.
Hi can i sue the online broker if he told me i can make money by depositing in the account for binary option and he will help me and guide me what to choose to make money but instead of making money he lead me to the wrong direction?
I have received good advise from a stock broker, the stock is doing very well, however I have instructed the broker to sell the stock and have received no response, i have obvious concerns with respect to their integrity, as I am unable to get hold of my broker now, how can I track these guys down, and identify whether these guys are the real deal or not? How can I track to whether my stock was actually procured, I have receipts, but no share certificate, upon requesting it was understood the process took a period of 90 days? in the event that I find out that they are not legal and have carried out a fraud act, can you advise me on who best to report them to, Many thanks
Please see the resources and instructions in the article. The fact that you can’t track them down and won’t reply is not a good sign. Hoping it all works out for you…
I recently recovered my initial investment from a scambroker. Glad the mess is in the past now.
I’m sorry to hear about your experience. Thanks for sharing. It helps people to realize this really does happen.
Thanks for sharing this Diana,it would surely go a long way bringing back hope to people who have also lost funds to other scam brokers. Thanks
HI
I might be scammed ….who did you use to recover your money?
Thanx
I got my money recovered. Thanks to the email above
Congratulations! I’m glad these resources helped and you were able to recover your funds.
thanks for the information and posts
I had a broker buy 3 stocks for a total of 75000 he told me that it was going to eventually go up a lot. Fast forward 2 years I lost 2/3 of my money stock went down a lot he never called to say that these stocks are no good anymore. Eventually I get a letter from the brokers boss telling me how much money I lost and to tell me that I’m in a very risky stocks is that fraud?
Hi Jack, This is Theresa, Todd’s Assistant. By law, we are not allowed to give personalized financial advice or legal advice. Our job is purely educational so you can make fully-informed, independent decisions. As to your question, you would need to contact an attorney to decide.
My parents’ broker told me that my parents gave me an annual gift of $10k for 25 years. I know this is wrong and told him I was gifted 4 times. He insisted that I was wrong and he knows because he sent the money directly from his firm to me. So, I pulled all of my tax forms and bank statements (since banks won’t cash $10k, I had to have deposited it) as proof of when I got it and asked him to provide proof as well. I am unconcerned about getting the money now. My concern is that their trust co officers and attorney also believe the broker, who is now trying to change the subject and create distractions to avoid having to prove his case. He’s now saying that they sometimes gave $$ to my parents without asking where it was going. However, he clearly stated (and I recorded it) on the phone that he sent that money to me directly. I’m afraid to contact anyone at his firm because he’s at the top himself and they won’t want to lose him; he’s been there a long time.
Lana, this doesn’t sound good, but it’s beyond the scope of a blog comment to deal with. The law specifically prohibits me from giving personalized financial advice or legal advice on this site, which operates under the education exemptions in the financial advisory laws. While there appear to be issues here, this would be the domain of a personal financial advisor or attorney to sort out. I hope that is helpful.
I’ve invested a small amount in bitcoin. My investment is short term and finishes Friday. My broker says I’ve to pay his company 10% before I can have my payout. I thought they would take the fee then give me the earnings but they won’t. I’m scared that they are scamming me. What do you think
yeah i invested $150 at first with a broker, i was scared at first. there are really good investment brokers out there. A 30% return of my profit was cool. I see some brokers advertising 100% return within a short while. Its not all that easy. The root to steady cash flow may be small but stick to it.