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How to Research Your Investment Broker or Firm Before You Hire Them

November 20, 2021 Blog

As an investor, you need to make informed decisions. This applies to the decisions you make about the securities you buy and your decisions about hiring an investment broker. Unfortunately, broker fraud is a very real concern, and each year numerous investors are forced to take legal action to recoup their fraudulent investment losses.

Breaking Down Examples of Fraud Committed by a Broker

To understand the importance of doing thorough research before hiring an investment broker, it helps to understand what is meant by the term investment broker fraud. Broker fraud typically takes one of three different forms:

  • A Broker Misrepresenting His or Her Credentials – Inexperienced brokers or brokers who have had issues in the past may misrepresent their credentials to attract new clients. For example, a broker may falsely claim to have certain professional designations, or a broker may falsely claim to be registered with the Financial Industry Regulatory Authority (FINRA).
  • A Scam Artist Claiming to Be a Broker – Another risk for investors involves hiring a scam artist who isn’t a broker at all. Unfortunately, these imposter scams are becoming increasingly common due mainly to the ease with which scam artists can create convincing profiles online.
  • An Investment Broker Engaging in Fraudulent Transactions or Conduct – Even legitimate brokers commit fraud against their clients. This includes everything from misappropriating clients’ funds to front-running clients’ transactions and from providing unsuitable investment recommendations to recommending the investment products that offer the largest commissions.

With these risks in mind, it isn’t hard to see why investors need to carefully choose their brokers. While thorough research does not guarantee protection against broker fraud, it significantly mitigates investors’ risk of suffering fraudulent losses.

5 Steps to Take Before You Hire an Investment Broker

So, what can you do to mitigate your risk of falling victim to investment or stockbroker fraud? Here are five steps to take before you hire a broker to help you invest:

1. Do Some Online Research

Whether you get a referral from a friend or family member (which is often the best approach to finding a broker), find a broker yourself, or get contacted by a broker who wants to work with you, you should do some online research. Read the broker’s profile on the brokerage firm’s website, see if the broker has a profile on LinkedIn, and use a search engine to look for additional information.

When doing your online research, you should be looking for a couple of things in particular. First, is all of the information consistent and professionally written? Inconsistencies and poor grammar are often indicative of imposter scams. Second, does the broker have the experience and credentials to help you grow your portfolio? Just like doctors and other professionals, not all investment brokers have the same level of expertise.

2. Ask Lots of Questions

Once you make your initial selection, you should schedule a time to speak with the broker in person or over the phone. This is a critical step, and it is, unfortunately, a step that many investors choose to skip. If a broker tries to get you to sign a contract or transfer funds without speaking first, this is a major red flag. Legitimate brokers will want to talk to you before forming a relationship so that you can both determine if you want to move forward.

When meeting with an investment brokerage, you should expect the broker to voluntarily provide information about his or her background, the investment products and services he or she offers, and his or her approach to client service. You should also be prepared to ask questions such as:

  • How long have you been with your current brokerage firm? How long were you with your prior firms?
  • Do you have long-standing client relationships?
  • How will you choose which investment products to recommend to me?
  • Where can I learn more about you and your firm?
  • Do you have a few current clients I can call as references?

3. Verify the Investment Broker’s Registration and License

All investment brokers should be registered with FINRA and licensed by their state’s securities regulator. Before hiring a broker, you can (and should) verify the broker’s registration on FINRA BrokerCheck and verify his or her state license through the relevant link on NASAA.org.

If a broker offers insurance products such as variable annuities or life insurance policies, you should also verify that the broker is licensed with their state’s insurance commission. You can find a link on NAIC.org.

4. Verify the Broker’s Professional Credentials

If a broker lists credentials such as Accredited Asset Management Specialist (AAMS) or Certified Financial Planner (CFP), you will want to verify these credentials as well. You can find the relevant links through FINRA’s Professional Designations database.

5. Verify the Broker is an SPIC Member

As an investor, it is also a good idea to confirm that the broker you choose is a member of the Securities Investor Protection Corporation (SPIC). While the SPIC does not protect against fraudulent practices, it provides limited protection if a brokerage firm goes bankrupt. While it will be good to know this protection is in place, it is more important to know that the brokerage firm you choose is doing everything that a legitimate brokerage firm is supposed to do.

Investors Must Monitor Their Portfolios for Signs of Investment Fraud

As an investor, protecting yourself against broker fraud is not a one-time event. Even once you do your research and make an informed decision, it is still very important to monitor your portfolio on an ongoing basis. When monitoring their portfolios, investors should look for signs of stockbroker fraud such as:

  • Securities or funds missing from your portfolio
  • Excessive trading of mutual funds or other long-term investments
  • Investments in securities or complex investment products you don’t understand
  • Unauthorized trades on your account
  • Unexecuted trades or trades executed later than you requested
  • Overconcentration in a particular industry or type of security
  • Inconsistencies between your own records and your account records
  • Evidence that account statements have been altered
  • Overly consistent returns
  • Being locked out of your online account

If you have any concerns that you have may be a victim of investment fraud, it is imperative that you schedule a consultation at a law firm experienced with these claims in order to prevent further losses. Our attorneys at Zamansky, LLC are always here to help.