5 Tips for Preventing and Discovering Stockbroker and Investment Fraud

Frauds can go undetected for years, so what can investors do to prevent, identify, and address this growing issue?

In a financial environment where a uniform fiduciary standard for brokers doesn’t yet exist, it pays for clients to be constantly vigilant for signs of stockbroker and investment fraud. Even when brokers are legally required to act in your best interest, it is still in your best interest to confirm that they are. Sometimes it can take years to detect a problem, so what can you do to spot fraud? How can you confirm that a fraud has occurred? And what do you do when the worst has happened to you?

1. Choose the right broker

One of the best ways to avoid fraud is to make sure you choose a reputable broker and brokerage firm with a history of treating clients well. Ask friends and family members about what firms they use, look online for news and reviews of particular brokers and firms, and don’t forget to use FINRA’s BrokerCheck to look for a broker or firm’s licensing, violations record, and complaint history.

2. Have trusted associates review your investments

Most cases of stockbroker and investment fraud aren’t actually discovered by investors. Instead, CPAs, attorneys, friends, and relatives often notice inconsistencies, oddities, or abnormally large losses in a victim’s accounts and are often the first to discover the fraud.

In many cases, the victims had been suspicious of the broker or firm for a while, but didn’t take action or investigate the matter further. The desire to believe a manipulative broker’s promises of future wealth, combined with the desire to avoid being proven wrong, often leads clients to overlook or ignore inconsistencies and losses that they would otherwise notice.

Even if you completely trust your broker, it’s a good idea to have a second set of eyes on your investments. Even if your broker or financial advisor is truly acting in your best interests, they may have you in an investment that is excessively risky or unsuitable for your current financial goals (even if they think it’s right for you.)

3. Avoid cold calls and high pressure tactics

If you’re getting constant calls from brokers or investment firms, it’s a good idea to avoid investing with them. This is especially true if the callers are using high pressure tactics to convince you to meet or invest with them.

Claims of extremely high potential profits, tight investment deadlines, extremely low risks, quick payoffs, and personal attacks on the caller or the caller’s financial status are all signs of intimidation and potential signs of fraud.

Claims of inside information are also highly suspect; legitimate brokers know that insider trading is illegal and wouldn’t discuss it; especially on the phone with a client they’ve never even met.

4. Understanding realistic profits

When evaluating a broker’s claims, it is important to keep in mind that the S&P 500’s average returns (factoring in inflation and dividends) for the last 50-60 years has been approximately 7% . In comparison, the very best companies and funds in the world (like Warren Buffet’s Berkshire Hathaway and the Fidelity Magellan Fund under legendary investor Peter Lynch) have only been able to achieve approximately 15-25% annual returns on a regular basis. These returns are highly atypical and do not represent anything close to the returns an average investor can expect from stocks, bonds, mutual funds, REITs, ETFs, and other kinds of publicly traded, moderate-risk investments available to the average consumer.

Therefore, if a broker claims that his fund or investment will return more than 20% a year or that any profits are “guaranteed,” it’s a good idea to keep your guard up. Plus, if a broker claims that “your money will double in six months,” it’s a near-guarantee that they’re being dishonest and you may want to consider reporting them to FINRA or the SEC.

5. Education is the best prevention

Choosing the right broker and brokerage firm, having friends, family members and other trusted professionals review your investments, avoiding cold calls and high pressure tactics, and having realistic expectations are all great ways to avoid stock broker and investor fraud.

However, the most effective method to avoid getting defrauded is education. If you’re serious about getting the highest possible returns on your investments and avoiding fraud, buy or borrow books about investing. Properly educating yourself will help you learn what’s legal, what’s illegal, what’s realistic, and what’s unrealistic when it comes to investing, and will allow you to protect yourself and your family from bad investments, unethical brokers, and financial fraud.

If you think you may be a victim of fraud

You may want to speak with an experienced securities arbitration attorney to determine whether a fraud has occurred and to investigate your legal rights to pursue the losses you have sustained. The attorneys at Silver Law Group have recovered over $100 million dollars for wronged investors and have handled over 1,000 FINRA arbitration claims.