Broker misconduct, or securities fraud, can cost a family hundreds of thousands of dollars in an instant. “Broker misconduct” is an umbrella term that refers to a range of ways a broker can betray the trust of his or her investors.
A broker should be a source of appropriate recommendations, transparent information, and honest advice. They are an investor’s connections to Wall Street, and should be recommending suitable investments to their clients and helping them create a diversified portfolio. The broker-investor relationship relies on the ability to trust the broker to provide suitable recommendations and treat their clients fairly. Brokers must act in the best interests of clients throughout the investment relationship.
The basic responsibility held by brokers is the duty of fair dealing. The duty of fair dealing is, in essence, a broker’s promise to disclose all facts relating to an investment, follow client instructions, ensure investments are suitable, and charge fair market rates. Investors trust brokers to steer them in the right direction regarding investments, and advise them candidly.
Brokers have many professional duties during the broker-client relationship, including (but not limited to):
- Making suitable recommendations.
- Making fair and balanced risk disclosures.
- Managing a client’s investment portfolio.
- Disclosing conflicts of interest.
- Researching financial markets.
- Monitoring clients’ investments.
- Reporting information to clients.
Authority (FINRA), the federal securities laws and the state securities laws have strict rules and regulations when it comes to a broker’s conduct. Although these rules exist, there will always be unscrupulous brokerage firms that abuse their position. These firms push their brokers to recommend poor investments in order to increase their own profits at the expense of their clients.
Without truthful and complete disclosures, scheming brokers sell unsuitable investments and mislead their clients to their detriment. Securities fraud and misconduct run the gamut from simple acts of misrepresentation to large and complex ponzi schemes.
Stockbroker Misconduct Statistics
According to statistics on the Financial Industry Regulatory Authority (FINRA), complaints
by investors have been on the rise since 2012. In 2016 alone there were:
complaints from investors levied against the brokerage firm or broker themselves.
disciplinary actions filed against the responsible party.
actions that were ever resolved
That means that in 2016, only 75 percent of all investor claims
were resolved, while in 2012, almost 90 percent of them were.
What that tells you is that
It’s a broker’sIt’s a broker’s job to research the market, understand their client’s situation, and recommend investments that are appropriate for them. No broker should compromise your future with unsuitable investments. job to research the market, understand their client’s situation, and recommend investments that are appropriate for them. No broker should compromise your future with unsuitable investments.
Misleading or Incomplete Information
If a broker misleads a client regarding the risk of an investment or fails to disclose material information, this may be a violation of the broker’s obligation to his or her client.
When a broker excessively purchases and sells securities in a client’s account (with or without authorization), it’s a red flag for broker fraud. Churning, or excessive trading, can generate extra commissions and fees for the broker.
Very similar to churning. When a stock broker earns commission, it can create a conflict of interest where they want to make as many investments sales as possible.
Selling away is when a broker goes against the wishes of their firm to sell you a vast amount of unauthorized investments. This is an inappropriate practice that violates regulations.
When a broker starts making trades without the consent of their clients. A broker should never trade behind an investor’s back, and this kind of behavior often leads to defrauding.
Lack of Diversification
Brokers should know the importance of investing in a variety of assets. Diversifying makes sure that when one company loses stock, the entire portfolio is not affected by its losses. Despite this, many brokers don’t participate in this tactic.
Excessive Use of Margin
When you are buying on margin, you are essentially borrowing money from the brokerage firm. Brokers often take advantage of this and excessively abuse your portfolio to collect commission.
Fraud or Misrepresentation
When a broker lies or misrepresents bad investments as stable sources of earnings to pawn them off to unsuspecting clients. Brokers are hired by their clients to better their investments, not rake in profits off of them.
Violation of State and Federal Regulations
Brokers have to abide by the laws and federal regulations set forth to protect investors. They have to provide honest information and uphold a professional relationship with their client. When they break these laws, they can be held accountable.
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