In an ideal world, a stockbroker would help you invest your hard-earned money in profitable investment opportunities and help you earn huge returns—and then charges you for the services rendered. But in the real world, most stockbrokers are out to feed fat on you, the client. Aside the commission you pay them, they are constantly seeking other ways to eat into your returns. And if you are not vigilant enough, you won’t know about this in decades!
Your stockbroker can rip you off in many ways. They can execute and cancel trades in your portfolio, and then pocket the profits. And to ‘clean their tracks‘, they can make it appear that the trades originated in their own account. You can only detect this after some extensive scrutiny.
Other ways your stockbroker can rip you off include charging “12b-1” fees (additional annual compensation that you pay to the broker) as well as management and administrative fees. But you can actually protect yourself from stockbroker fraud–provided you really want to. Here are 10 tips to avoid being ripped off by your trusted stockbroker:
10 Tips to Avoid Being Ripped Off By Your Stockbroker
Table of Content
- 1. Scrutinize all offers
- 2. Ask to know all fees
- 3. Establish the broker’s credibility
- 4. Monitor your investment and ask tough questions
- 5. Be particularly cautious if you have little experience
- 6. Always watch your stockbroker’s reactions
- 7. Don’t hesitate to cry foul
- 8. Don’t be a courtesy victim
- 9. Don’t be friends with your stockbroker
- 10. Don’t judge by appearance
1. Scrutinize all offers
When your stockbroker tries to force some offers down your throat, it’s usually not because they actually want those huge profits for you; it’s because there’s a lot for them in that offer! So, say no each time your stockbroker tries to pressure you to make an immediate decision about a new offer. You have the right and responsibility to make your own investment decisions, so you should be compelled to do make a decision without knowing its likely consequences.
2. Ask to know all fees
Before signing a deal with a stockbroker, ask to know how much they charge for their services. Ideally, they should charge no more than the commissions. But if they charge additional fees, ask them to make you aware of those, too. Do a periodic check on how much your stockbroker is actually deducting. Do the charges sum up to the same total you are aware of? If no, that’s a red flag that your stockbroker is stealing your money. Question them immediately!
3. Establish the broker’s credibility
Most stockbrokers will list some crazy-looking abbreviations after their name (they call these qualifications or certifications). Don’t be fooled by such. Those designations are merely a reflection of the stockbroker’s ability to write and pass certain exams, not necessarily an indication of their expertise or credibility.
You must objectively establish the credibility of your stockbroker before entrusting them with your hard-earned money. Ask for contact details of clients that the stockbroker has worked with, and contact those clients to ask about the stockbroker’s services.
4. Monitor your investment and ask tough questions
Don’t trust your stockbroker to make every financial decision for you. Even if you do, you must keep an eye on the progress if your investments. Check everything in detail. Look out for unauthorized or excessive trading in your funds. Don’t be fooled by assurances that any strange observation is in your best interest. Always ask tough questions when necessary.
5. Be particularly cautious if you have little experience
If you have limited or no experience when it comes to handling investments; then you are the ideal victim for a fraudulent stockbroker. And you need to be very careful. Always seek advice from experienced investors and others who understand how investing works. You need to research extensively to understand how to monitor your investments and how to know if your stockbroker isn’t straightforward.
6. Always watch your stockbroker’s reactions
If your stockbroker frets or stalls you each time you try to pull out your principal or profits, or when you ask to see your investment reports, chances are that stockbroker is pocketing your profits. Such stockbrokers will try too hard to convince you not to pull out your funds or give you lengthy reasons why your savings are not available. They may even deceive you further by telling you that your profits have been rolled over or reinvested into new lucrative investments. This will only delay your discovery of the fraud. Be smart!
7. Don’t hesitate to cry foul
Whenever you notice that your stockbroker is ripping you off, don’t feel too shy or embarrassed to report to the appropriate quarters. Fraudulent stockbrokers are aware that most clients are usually reluctant to report them. So, they count on this to prevent and delay the time they will get busted.
You have no reason to fret before reporting a con artist. It’s your money he’s mishandling, and you have every right to seek justice. If you are in the U.S., the Securities Division of the Department of Financial Institutions is one of the best resources to report to.
8. Don’t be a courtesy victim
Fraudulent stockbrokers usually exploit the good manners of their clients. So, they feel free to talk their clients into taking any decision. Truth is, you absolutely have no obligation to stay up on phone or listen to your stockbroker all the time, especially when he’s asking you to make a decision you are really not comfortable with.
9. Don’t be friends with your stockbroker
Friendship fosters blind trust. So, by being friends with your stockbroker, chances are you will trust more than you should, and you will downplay normal due diligence. Avoid working with stockbrokers you know through your club, church, or business, because you will hardly scrutinize such—even when it’s obvious that they are feeding fat on your money.
10. Don’t judge by appearance
Never judge a stockbroker’s integrity by how they look or sound. Many investors have been swindled and ripped off by stockbrokers who appeared and sounded professional. Fraudulent stockbrokers rarely come across as unprofessional; they sound so professional that they can make even stupid investment deal sound as safe as putting money in the bank.