While there are more investment options than ever, for many people it will still make sense to invest through a broker or advisor. Working with an investment professional offers several benefits—from access to the professional’s recommendations and insights to active portfolio diversification and asset management.
While working with a broker or advisor offers several benefits, it also comes with potential risks. These risks go beyond losing your money due to ordinary market forces. As a result, it is important to choose your broker or advisor carefully; and, once you hire a professional to help you invest, you should monitor your account on an ongoing basis.
Here Are Seven Key Facts to Know Before You Make Your First Deposit
Unfortunately, investment fraud is a very real concern. While many brokers and advisors are experienced professionals who uphold their obligation to put their clients’ interests first, others are only in it for themselves. As an investor, you need to do what you can to choose a reputable investment professional, and then continue taking steps to protect your portfolio going forward.
With this in mind, here are seven key facts to know before you make your first deposit:
1. Investing with a Broker or Advisor Does Not Guarantee Your Money Will Be Safe
First and foremost, while investing with a broker or advisor is one of the safer ways to put your money into the market, it does not guarantee your money will be safe. You can still suffer losses due to market forces and fraud.
Ideally, you will see a reasonable rate of return over time—and this is what happens in most cases. As long as you are patient, your portfolio should weather any downturns and grow in value overall. But, if you fall victim to fraud, you could suffer substantial and irreparable losses that leave you with no choice other than to take legal action.
2. You Need to Do Your Due Diligence
How can you protect yourself against broker or advisor fraud? One of the most important steps you can (and should) take to protect yourself is to conduct thorough due diligence. Among other things, this involves:
Choosing a Reputable Firm and an Experienced Broker or Advisor
You can start by choosing an experienced broker or advisor at a reputable brokerage firm. While this does not guarantee you will be safe from fraud, it can significantly mitigate your risk.
Checking FINRA BrokerCheck
After identifying a broker or advisor who you think might be a good choice, you can put the broker’s or advisor’s name into FINRA BrokerCheck. If the broker or advisor has a history of complaints or disciplinary actions, they should show up here. Importantly, if the broker or advisor does not appear on BrokerCheck, that is a red flag as well—since any investment professional you choose should be registered with FINRA.
Talking to Current Clients or Seeking Recommendations
Another step you can take to gather information is to talk to current clients or seek recommendations from friends or family members. Once again, there are no guarantees, but if a broker’s or advisor’s clients leave favorable reviews, this is generally a positive sign.
3. You Need to Watch Out for Fraudulent Online Profiles
When doing your due diligence, be careful to watch for fraudulent online profiles. There have been multiple instances of scam artists creating fake websites and social media accounts, often using the names (and photos) of brokers and advisors that you will find on BrokerCheck. If you find information on a firm’s website and can confirm it is authentic, that information should generally be reliable. But otherwise, you need to be careful about choosing someone based solely on their online presence.
4. Once You Invest, You Should Check Your Account Regularly
While protecting yourself starts with making an informed decision about the broker or advisor you choose, this is not the end of the process. Once you invest, you should check your account regularly. Make it a habit to log in to your account at least once a month and ensure everything looks as it should. Review your account statements as well, paying particular attention to deposits, trades, withdrawals, fees, and any other transactions.
5. There Are Several Red Flags for Investment Fraud
What should you be looking for when checking your account? Investment fraud can take many different forms, and sophisticated fraud schemes can be difficult to spot. With this in mind, you should be looking for red flags such as:
- Missing deposits
- Unauthorized withdrawals
- Excessive trades
- Excessive fees (i.e., fees that equal or outpace your returns)
- Investments you don’t understand
These are just examples. Ultimately, if you have any concerns, you should try to get to the bottom of them as soon as possible.
6. Investment Fraud Can Take Many Different Forms
These red flags (among others) can indicate various forms of investment fraud. Investment fraud can take many forms, and as an investor, it is important to ensure you know when legal action may be warranted. Some of the more common examples of broker and advisor fraud include:
- Providing unsuitable investment advice
- Engaging in conflicts of interest
- Charging excessive fees
- Account churning
- Selling away and making other high-risk investment recommendations
Here too, these are just examples. From promoting Ponzi schemes to directly misappropriating investors’ funds, broker and advisor fraud can take numerous other forms. As an investor, the key is to be diligent—and to seek help as soon as you have concerns.
7. If You Have Concerns, You Should Not Ignore Them
This brings us to our last point: If you have concerns as the client of an investment broker or advisor, you should not ignore them. While there might be a legitimate explanation for the losses you are seeing in your portfolio, there also might not. If there is no legitimate explanation, taking prompt action could be critical to recovering your fraudulent investment losses.
