Sadly, dishonest brokers and brokerage firms are lurking on the Internet. This article gives tips for spotting and avoiding these scam artists.
Low transaction costs can make online trading an attractive investment option. Sadly, dishonest brokers and brokerage firms are lurking on the Internet, waiting to cheat trusting investors. The good news is that knowledge and research are great tools to help you spot and avoid dishonest brokers.
An investor should always ask plenty of questions and listen carefully to the answers. Ask for references and call them. Find out how long the company has been around, and ask about their history. Look hard at new firms, since dishonest firms often close and reopen under new names.
Check the broker’s record with the National Association of Securities Dealers (NASD), the leading private-sector regulator of securities services in the United States. If any disciplinary actions show up, don’t invest.
Find out how much of the money is spent on fees and commissions. Request a fee schedule in writing, and see how the prices compare to other firms’ fees. Make sure you read all the details of any documents you are given and are aware of any hidden costs, such as high fees for selling the investment. Keep in mind that a broker should never ask you to write a check to him.
Find out what customer service is available through the brokerage firm. Will you be able to talk to a live person if you have questions after you’ve invested your money, or will you be directed to a recording? Is the firm’s web site confusing, or informative and easy to navigate?
Make sure you have all the information you need about a proposed investment to make a sound decision. If the broker threatens that taking the time to research and consider the investment will cause you to miss out, be suspicious. You should also be cautious if the sales representative makes promises about the investment’s incredible profitability. Ask about the risks and request a risk disclosure statement and a prospectus. Beware of the investment if the broker cannot provide them.
Suggest that the broker discuss the investment opportunity with your financial planner. If he comes up with reasons why he can’t, it’s a scam. Also, see how the broker responds to a request for a written description of the investment. Dishonest brokers don’t like to put anything in writing since it could be used against them at a later date.
Ask on which exchange the investment is traded. Fraudulent securities are never traded on exchanges, such as the Chicago Stock Exchange, while most valid investments are. Also, ask what regulatory agency oversees the investment. You can investigate the investment’s status through its regulatory agency and find out the agency’s guidelines for resolving disputes.
If after careful consideration you decide to go ahead with the transaction, always carefully read and file any information you are sent about your investment, as well as any letters or email from the broker. Check paper statements against online account statements to make sure they match. If you see anything suspicious, contact the broker at once with your concerns. Go to the brokerage firm’s compliance representative or manager if you’re unhappy with the broker’s answers to your questions.
Investing your money is an important decision, and one that should be made only after much research and reflection. Educate yourself through books or classes about investing. Carefully select the broker and firm to whom you entrust your money, and when considering investments remember that old adage: if it sounds too good to be true, it probably is.
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