Dishonesty, corruption, underhandedness: you can call it whatever you wish, but these kinds of tactics occur daily in every industry. You expect your broker to be honest and ethical, but that isn’t always the case.
The Securities and Exchange Commission (SEC) and the National Association of Securities Dealers (NASD) do their best to regulate brokers, but sometimes, a corrupt one slips through the cracks. Some are smarter than we think and will score big with your money if you aren’t careful.
Other than doing your due diligence into your possible broker, be aware of the three crooked strategies highlighted below. If any of these actions are present, raise your red flag and distance yourself (and your money) immediately.
Always keep a keen eye on your portfolio. If it shows an unusually high number of transactions with no gain, your broker is likely churning. Crooked brokers will perform this tactic to boost their own commissions.
Selling off your dividends
Otherwise known as a “quick and easy gain,” dividend selling in another tactic to increase the money in a broker’s pocket. The broker will try to sell you a particular stock or mutual fund and preach the potential quick-hitting dividends. The dividend you are hoping for will likely create a tax liability that will hurt your portfolio.
It’s called a breaking-point sale. Your broker or mutual fund company may have a sales charge on investments they feel qualify such charges. This tactic isn’t unlawful, but it’s very misleading as the charge could force you to pay more than needed.
Always keep an eye and ear open to see and listen for unsuitable transactions. If the investment doesn’t very clearly fit your objectives and goals or seem suspicious in any way, stop and research the broker and investment before pursuing the opportunity. If you feel litigation is warranted, don’t hesitate to act.