Finding and Using a Stock Broker:
Protecting Yourself


Unfortunately, it has been a far to common experience that an unscrupulous broker somehow takes advantage of a client.  While most brokers have a sincere interest of helping their clients and acting with honesty and integrity there are some who gravitate to the business with questionable motives.  Usually it is those who cannot afford to sustain the losses that wind up victims of their unethical practices.   This article will discuss some ways you can spot an unscrupulous broker and methods you can use to ensure that you are not taken advantage of.

First of all it is important to discuss some of the ways in which an unscrupulous broker can take advantage of you and create unnecessary charges and/or fees in managing your account.  Most of these fall within the "incentive" category.  This means that the broker is being compensated for urging action upon you, which he profits by at a much larger rate than other types of activity.  Usually, these types of brokers share certain characteristics, which we will discuss in a moment. For the time being, let's go over some of the more frequent ways people find themselves cheated:

  1. Churning -- Churning is a by far one of the more popular practices. Churning means that the broker is moving you in and out of a stock or investment for the sole purposes of accumulating brokers fees and charges upon the activity itself. 
  2. Inappropriate Investment -- This is an instance where the broker places someone in an investment on the basis of a higher payout when another investment would be better or just as appropriate.  Most often this takes place with annuities, which tend to give high payouts to the broker.  However, sometime an annuity is the appropriate choice -- especially when someone is seeking income.  An ethical broker will fully disclose all the pros and cons.
  3. Excess Fee's -- Often a broker will advise opening multiple accounts when a client really does not need them.  In certain cases this can be a case of the broker generating fees for each account opened.  However, sometimes multiple accounts are necessary for legal reasons.
  4. Retirement Rollovers -- This area is gray as opposed to other area.  Most often it involves a recommendation to rollover money from a previous retirement plan for no discernable purpose other than the broker counting those assets in his or her production numbers.  Sometimes there are fee's involved with this type of transaction.  Other times there is just no tangible benefit for the rollover.  If you find your broker recommending this then ask questions and get him to tell you the pros and cons of such a move.
  5. Market Maker Transactions -- Often a particular broker will be employed at an investment house that is the market maker for a certain stock. When this is the case the reps are compensated extra when they sell a share of that particular stock or investment.  A statement will disclose these fees and can easily be spotted by the astute investor.

There are certain telltale signs that a broker may not have your best interest in mind.  However, this does not mean they are unethical necessarily.  They may just be overly self-interested at your expense.  Either way there are certain characteristics that these type of brokers display which are easily spotted by pragmatic investors:

  1. Disclosure -- An ethical broker will always tell you both pros and cons of any recommendation.  If your broker is painting a picture much too perfect then you should be wary.  Brokers that tell you the bad are usually trust worthier than those who only tell you the positives.
  2. Track Record- If your broker is new to the business and has come from a long line of commission oriented jobs and displays personality over technical knowledge then be wary.   There are exceptions but in many cases this is the sign of a broker more interested in commissions and his or her own best interest.
  3. NASD Record -- It is a simple manner to check the past disputes of a particular broker.  All one needs to do is go to the NASD website and do a search for the broker by name or license number.   There are instances where an ethical broker will receive a complaint so judge on the basis of more than just the record alone.

These guidelines will give you some basic things to watch out for as well as some general characteristics of brokers that could be out to swindle you.  If you pay attention and maintain a sensible amount of wariness you can make sure the person they take advantage of won't be you.



Information is for educational and informational purposes only and is not be interpreted as financial or legal advice. This does not represent a recommendation to buy, sell, or hold any security. Please consult your financial advisor.