Is Your Broker Legit? 6 Steps to Take (2024)

If you think illegal activity and other shenanigans by brokers and other investment professionals ended with the lastGreat Recession, you could be making a costly assumption.

AlthoughPonzi schemerBernie Madoff and "Wolf of Wall Street"Jordan Belfort have been sent to prison for financial crimes, wrongdoing by brokers and others continues unabated and undetected. That’s why it’s important to check out brokers or investment advisors and their firms before doing business with them.

Key Takeaways

  • While investing has become safe, low-cost, and efficient for ordinary investors, some instances of brokerage fraud still do take place to fleece unsuspecting or greedy investors.
  • There are several ways to check and see if your broker is legit. Always do your homework beforehand.
  • Check the background of the firm and broker or planner for any disciplinary problems in the past, beware of cold calls, and check your statements for funny business.
  • When in doubt, there are several routes to file complaints and seek restitution.
  • FINRA is the best resource to use when checking on a broker's status.

Example of Brokerage Fraud

The Securities and Exchange Commission (SEC) charged Raymond J. Pirrello, Jr., Marcello Follano, Robert Cassino, Anthony DiTucci, Joseph Rivera, and their associated companies for orchestrating fraudulent schemes. These schemes related to pre-initial public offering (IPO) companies.

Operating primarily out of New Jersey and New York, the defendants had allegedly utilized a network of unregistered sales agents to solicit over $528 million from more than 4,000 investors globally. Despite assuring investors of no upfront fees, the defendants had purportedly imposed undisclosed markups, funneling over $88 million in illicit profits for themselves and their sales agents.

Filed in the U.S. District Court for the Eastern District of New York, the complaint charged the individuals and four entities with violations spanning antifraud, securities, and broker-dealer registration laws. Seeking injunctive relief, disgorgement of profits, and civil penalties, the SEC had also sought officer and director bars against key figures involved in the scheme.

By taking the following six steps, you can protect yourself from doing business with an unscrupulous broker or other financial professional as shown above.

1. Beware of Cold Contacts

Be wary of any broker or investment advisor who contacts you unsolicited from a company with which you've never done business. The contact could take the form of aphone call, email, or letter.Don’t get sucked in by invitations to investment seminars that promise free lunches or other gifts aimed at getting to you lower your guard and invest blindly. Be especially suspicious of callers who use high-pressure sales tactics, tout once-in-a-lifetime opportunities,or refuse to send written information about an investment, advises the SEC.

You should also be aware of certain rights you have as a prospective investor when receiving a cold call. The SEC has outlined many rules. For example, calls can only occur between 8:00 a.m. and 9:00 p.m. at home, with exceptions for existing clients or with prior permission. In addition, callers must identify themselves and their purpose and honor requests to be placed on a "Do Not Call" list.

2. Have a Conversation

Whether you’re looking for a broker or afinancial advisor, you need tobe comfortable with the people who'llbe providing you with advice, products,and services. Ask lots of questions about what the company offers and its experience with clients who have similar needs to your own.

Also, find out what relationship you’ll have with the professional. Under a so-called fiduciary standard, financial professionals must put their clients’ interests above their own when, for example, recommending investments. That’s a higher level than the so-called suitability standard, in which the professional is required only to make recommendations that are consistent with the client’s best interests. While investment advisors always must follow the fiduciary standard, that’s not the case for broker-dealers—though you may be able to find a broker-dealer willing to adhere to the fiduciary standard.

If you can’t get straight answers or the individual seems rushed or otherwise unwilling to provide you with full and clear information, go elsewhere.Don’t forget to ask about rates, fees,and commissions. Registered investment advisors should also provide you with both parts of Form ADV.

You are not required to have a broker to set up an investment account. It is possible for you to learn the intricacies of financial markets to buy, hold, and strategize regarding your own investment portfolio. Fs

3. Do Some Research

The first thing worth trying when researching a financial professional is a simple web search with the broker andfirm name.That might bring up new releases or media reports of alleged wrongdoing or disciplinary actions, client conversations on online forums, background information, and other details. For instance, typing “Lee Dana Weiss” into a search engine brings up hundreds of thousands of results, including a link to the news release about the SEC complaint again him and his firm.

Then try searching the regulatory agencies directly. Financial professionals and their firms are legally required to be registered with federal andstate securities regulators. And that registration information, along with the details of disciplinary actions taken against the individuals or firms, is available to the public.

Keep in mind that the agencies sometimes have overlapping enforcement jurisdictions and may provide similar information. Still, it’s worth checking them all because they may have different policies about the details they include and how long the data remain available.

Here is a list:

  • State securities regulators:The regulators in your state likely have information on licensing, registration, and disciplinary actions about brokers and brokerage firms, as well as on registered investment advisors. Also check any advice your state offers for researching a broker or investment advisor, such as the investor education materials offered by the New Jersey Bureau of Securities.
  • FINRA:Another good source of information about brokers and their firms is the BrokerCheck website operated by FINRA, an independent, not-for-profit organization authorized by Congress to protect investors. Some states refer visitors to the FINRA for broker information. But even if your state’s site has a lot of information of its own, BrokerCheck is worth visiting just to see whether there are any additional details.
  • SEC:Along with many state regulatory agencies, a primary source of information about registered financial advisors is the SEC’s Investment Advisor Public Disclosure (IAPD) website. There you can find the registration and reporting form ADV that most investment advisors and investment advisor firms are required to file with the commission or states. The form contains a lot of details about an advisor’s business. Under part 2 of the form, advisors are required to produce a plain-English brochure that lists, among other things, the advisor’s services, fee schedule, disciplinary information, conflicts of interest, and the education and business background of key staff. The investment advisor should provide that brochure to you, with periodic updates. But you also can find it on the IAPD website. Never hire an investment advisor without reading the entire form, advises the SEC.

4. Verify SIPCMembership

You also should verify that a brokerage firm is a member of the Securities Investor Protection Corporation (SIPC), a non-profit corporation that protects investors for up to $500,000 (including $250,000 for cash)if a firm goes out of business, in much the same way that the Federal Deposit Insurance Corporation (FDIC) protects bank customers. Wheninvesting, always make checks out to the SIPC memberfirm and not to an individual broker.

Keep in mind that some brokerage firms may offer additional insurance coverage beyond what is provided by SIPC. This insurance may cover losses exceeding the SIPC limits or protect specific types of investments that are not covered by SIPC, such as commodities or futures contracts. This additional insurance is normal and, in most cases, should not cause for concern.

5. Check Your Statements Regularly

The worst thing you can do is put your investments on autopilot. Checking your statements carefully—whether you receive them online or in print—can help you detect wrongdoing, or even mistakes, early on. Ask questions if your investment returns aren’t what you expected or if there are surprise changes in your portfolio. Don’t accept complicated assurances you really don’t understand. If you can’t get straight answers, ask to speak to someone higher up. Never fear that you’ll look ignorant or be viewed as a nuisance.

Technology has significantly streamlined the process of checking your brokerage account. You can use mobile applications provided by brokerage firms that allow you to monitor their accounts in real-time. Many brokerage firms offer online portals accessible through web browsers as well. There are many ways to get you set up with electronic access to specific types of data, both related to your portfolio and how other types of investments are performing.

The SEC has also published many guides to help you not only pick but maintain your broker.

6. When in Doubt, Withdraw Funds and Complain

If you suspect wrongdoing, remove your funds from the investment advisor. Then, file complaints with the same state, federal and private regulators whose sites you visited when you checked out the financial professional to start with.

If you think that you have a legitimate dispute with your broker or advisor, there are a couple of steps you can take. If your complaint is against a stockbroker, you need to file a dispute with either theSecurities and Exchange Commission (SEC)or FINRA.

Many financial professionals are members of a charter organization (you can usually tell by the abbreviations after their name). These organizations also have standards andcodes of ethics, so it's worth lodging a complaint with them as well. For example, if your complaint is against aCertified Financial Planner (CFP), you can file with the Certified Financial Planner Board of Standards. If it is against aChartered Financial Analyst (CFA), you can contact the CFA Institute.

Contacting your state or provincial securities commission is another avenue to take. Each state or province has a division that handles complaints against brokers, advisors, and financial planners. If these options don't work, your final course of action is to hire an attorney.

Can You Trust a Broker?

Because there are so many ways to check brokers, it is actually a bit rare to see a working broker who isn't licensed. However, a licensed broker could persuade you to make investments that benefit them or their firm more than you as a client. They could also use your money that is in their accounts for their own purposes, such as for obtaining margin or shoring up their own financial books.

How Do I Know If a Forex Broker Is Legit?

You can ask the broker for their Retail Foreign Exchange Dealer (RFED) number. You can also check with the National Futures Association or the Commodity Futures Trading Commission. Don't forget to simply search their name online, as those who have been taken advantage of in the past rarely stay quiet about such things, and you might see a post or page reviewing the company.

How Do I Find Out If a Broker Is Registered?

Most people use BrokerCheck when they want to see if their broker is registered and legitimate. It will tell you the investment advisors in the firm and what securities they are allowed to deal in. There is also a list of those that have been barred by FINRA from practicing.

Can Brokers Steal Your Money?

Brokers can absolutely steal your money, although it isn't common. What tends to happen more often is brokers will steer you into investments that benefit them or into investments they wouldn't themselves make. Essentially, they gamble with your money. This is why it is so important to make sure you are combing your statements regularly to ensure nothing seems off.

The Bottom Line

The Great Recession may be over, but wrongdoing by brokers and investment advisors continues. So do thorough research before you hand over your money to a financial professional, then closely monitor your accounts. Investments may not do as well as expected for legitimate reasons. But don't be reluctant to pull out your money if you become uncomfortable about your returns or have other concerns that the advisor doesn't respond to quickly and appropriately.

Is Your Broker Legit? 6 Steps to Take (2024)


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