If you think illegal activity and other shenanigans by brokers and other investment professionals ended with the last Great Recession, you could be making a costly assumption.
Although Ponzi schemer Bernie Madoff and “Wolf of Wall Street” Jordan Belfort may have spent time behind bars, 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. You also should beware of certain signs that a financial professional may be trying to victimize you.
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.
Examples of Brokerage Fraud
Here are just two examples of the continuing problems in the industry.
The federal Securities and Exchange Commission (SEC) filed fraud charges against a Massachusetts-based registered investment advisory firm and its owner. The agency accused Family Endowment Partners and its owner, Lee Dana Weiss, of, among other irregularities, advising clients to make certain investments without disclosing that Weiss would pocket half of the profits. The SEC also charged that clients were urged to invest $40 million in securities issued by companies in which Weiss had financial interests and from which Weiss received payments.
In another case, the Financial Industry Regulatory Authority (FINRA) announced that it had permanently barred from the securities industry a former registered representative of Caldwell International Securities Corp. after charging him with numerous securities violations, including churning customer accounts. Richard Adams’ excessive trading in two customer accounts from July 2013 to June 2014, FINRA said, generated more than $57,000 in commission while costing the customers more than $37,000 in losses.
By taking these six steps, you can protect yourself from doing business with an unscrupulous broker or another financial professional:
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 a phone 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. Sixty-four per cent of those 40 or older who responded to a 2013 survey by the FINRA Investor Education Foundation said they had been invited to a “free lunch” seminar.
And 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.
Have a Conversation
Whether you’re looking for a broker or a financial advisor, you need to be comfortable with the people who’ll be 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. (See also: Choosing A Financial Advisor: Suitability Vs. Fiduciary Standards.)
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 (see Step 3’s section on the SEC).
Do Some Research
The first thing worth trying when researching a financial professional is a simple web search with the broker and firm 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 and state 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 jurisdiction 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. To research by phone, call 800-289-9999.
- 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.
Verify SIPC Membership
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 (FIDC) protects bank customers. When investing, always make checks out to the SIPC member firm and not to an individual broker.
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.
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 the Securities 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 and codes of ethics, so it’s worth lodging a complaint with them as well. For example, if your complaint is against a Certified Financial Planner (CFP), you can file with the Certified Financial Planner Board of Standards. If it is against a Chartered Financial Analyst (CFA), you can contact the Association of Investment and Research.
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.
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.