If you invest money using a broker you may be taking a risk. Not all of these people will be working in your interest, and if you can’t spot when you’re been taking for a ride you could lose a lot of money. It is important to make clear that the dishonest broker is the exception rather than the rule, but there is no doubt that these ruthless individuals exist. The good news is that there are things that we can look out for so that can help us prevent being victim to this type of scam.
The Tactics Used by the Dishonest Broker
There are a number of tactics that dishonest brokers will tend to use; if we are aware of these tactics we will be able to look out for signs that we are being swindled.
- One way that the broker may try to take advantage of the clients is by selling dividends — this is sometimes referred to as the ex-dividend scam. In this situation the broker will try to convince the client that a certain stock is about to pay out a big dividend; the attraction to the client is that they can get in on this huge payout by buying stock now. What is really happening here is that the broker is out to make commission on the sale, and although the dividend may exist it probably isn’t going to turn out profitable because of the affect these payouts have on share prices. This type of poor advice is not only given about buying shares but also for mutual funds as well.
- One of the most harmful ways that a broker can work against a client’s interests is by using their power to keep on buying new stock on the client’s behalf — this is called churning. The broker’s motive for doing this is that every time they buy something they get a commission so the more purchases they make the more money they end up with — this type of approach is highly unlikely to make money for the client. One way to prevent this type of scam is to purchase a wrap account — with this type of account the broker only gets the same fee no matter how much they trade.
- Another common way that a broker can take you for a ride is by making investments that are against your stated aims. You may have made it clear in the beginning that you wanted to only take moderate risks with your investment, but now the broker is putting your money into high-risk ventures.
- One of the most insidious ways that a broker can scam clients is by always working in their own interests and not the clients. This can be more difficult to spot because of its subtleness; for instance the investor would have made more money by selling their stock at a slightly lower price, but the broker has hung on for higher commissions.