Types of Brokers Fraud and How to Avoid Them

Types of Brokers Fraud and How to Avoid Them

Have you been the victim of misconduct or Brokers Fraud? 

Most traders lack the knowledge and expertise required to detect brokers fraud or misconduct by the brokerage firm. There are various things which one can carry out if he/she doubts brokers fraud, and also there are multiple resources which help to turn to for legal representation or answers. 

With the plunge or fall in the investment portfolio valuation, investors often come across the suspicion of whether their online trading portal or brokerage company has given them valid advice or not. 

Misconduct from the broker side cannot always be prevented. Still, there are certain things that traders can do to mitigate the chance of significant investment losses because of unethical broker behaviour or fraud. 

Most common Types of Brokers Frauds 

Some common types of brokers frauds which traders generally face are listed below: 

Outright Theft or Conversion of Funds

One of the most blatant and worst types of brokers fraud is outright theft. In this type of brokers fraud, the broker will make use of their privileged position to intentionally misappropriate or steal the funds indirectly or directly from the sufferer trading account. It can happen in various ways; generally, brokers use tricky tactics to hide their scam. It is observed that generally disabled and elderly traders are at large risk of falling into this trap. It is because many of them do not understand their account statements. 

Unauthorised Trading

The broker requires your permission before they can carry a transaction on your account. As an obvious rule, this permission can come in two ways. 

  • First, you might have signed for a discretionary trading account. It is a type of account sign as an agreement that provides your broker proceed with particular types of trade on your account, without any requirement for your permission for each such transaction. 
  • Second, you might have opened a non-discretionary brokerage account. It is a type of account for which your broker is legally bound or forbidden for carrying any transaction without your permission for the particular trade. 

Misrepresentation or Omission of Material Facts

 It is the legal and personal duty of your broker to provide an honest evaluation of any proposed transactions. Beyond the ban on outright lying, other types of false tricks are also regarded as fraud. You have full right to decide if your broker omits any crucial facts or misleads any trading or investment opportunity. 

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Lack of Diversification

It is one of the famous sayings in the world of investing: One must never keep all his eggs in a single basket. As per the saying, in the case of investment in securities, one requires a larger number of distinct sacks or baskets. An impressive and managed portfolio is the structure that allows the trader to receive the best possible opportunity for a decent profit or return at the same time trying to keep your risk low and at a satisfactory level. 

A broker has to help his customer in maintaining a well-diversified portfolio that mitigates his risk and exposure. If someone loses his money due to over-concentrated of his funds by a broker, he should immediately look for the legal profession. 

Unsuitable Investment Recommendations

It is the professional responsibility of your broker to examine and carefully conduct an assessment of the trader’s individual situation. It is essential because investment opportunities vary for different types of traders. In addition to this, he must construct the compressive risk report of all securities which fit nicely in a trader’s profile. 

Suppose your broker forces you into an inappropriate investment, whether it is because the trade is too complicated or too risky. In that case, an individual has a legal right to take full compensation for any losses. 

Failure to Disclose a Personal Conflict of Interest

Consider a case when your broker asks you and gives you a tip to invest in an opportunity. Just because you trust the broker, you agree to spend a substantial amount on the stock. But, suddenly, you come to know that the broker had a significant ownership stake in the firm in which you are planning to invest, and he has not mentioned this detail to you. 

The situation discussed above is illegal. Brokers owe a fiduciary responsibility to their clients. In this, brokers are legally obliged to disclose all the essential details to their clients so that they can proceed with an informed decision. Failure to reveal the related conflict of interest is illegal.

Front Running of Transactions

It is the professional duty of your broker to get you the available price of the order you wish to put for trade. The final thing your broker must do is to take a better amount for themselves, leaving you to pay the surged costs. 

Front running takes place when your broker puts his order first for receiving a better price for themselves. He does such despite knowing that you have requested the order before him. After the price has surged, they place your order, leaving you to pay a higher net amount. 

Negligent Portfolio Management

Finally, the case arises when the broker commits a scam by negligence, costing their clients a massive amount of capital in the process. Brokerage firms and brokers sell trading services to clients, generally by promoting the firm’s competence and professional abilities. As regulated and registered specialists, brokers are needed to pursue their functions and duties with a particular minimum level of skill. 

Top 7 measures which trader can take for Brokers Fraud Investigation 

Carefully investigate the background of the broker 

Background data, as well as regulation certificates about all the brokers and brokerage firms, is listed on the official website of the particular broker. One must go through these dates deeply before starting. Avoid those brokers which are not regulated by any central financial authority. Besides, check the information: 

1) Regarding the number of complaints filed against the broker 

2) Whether the firm has been suspended or fined at any point. 

3) Amount paid by the firm to resolve the complaints. 

Finish and review new trading account forms accurately 

When a trader decides to open a trading account with a brokerage firm, they are needed to fill different forms, such as forms that state the customer’s investment objectives, net worth, income, risk tolerance. Decisions of brokers entirely lie on these documents for estimating if the particular investment is suitable for the trader or not. If you claim the inappropriate investment, then these documents will serve as essential support for your legal base. It is why traders should review these documents vigilantly to ensure that the data given is accurate. 

Review trade confirmations and account statements promptly

Traders should carefully review monthly account statements and trade confirmations as soon as they are completed and received. Never rely on account summaries made by the broker. A close review of these confirmations and statements can identify brokers fraud, excessive trading and unauthorised trading. 

Understand the real motive of a “happiness” letter

Many firms give a letter to a customer, generally known as a “happiness” letter, in case the brokerage firm’s repost unveils questionable account activity. The aim of this letter is to notify the customer to reach the branch manager with any problem without clearly declaring that their transaction account may involve controversial broker conduct. 

Always remember the purpose of this letter- a warning signal that you may have been the sufferer of brokers fraud or misconduct. Contact and inform the branch manager of your risk tolerance and investment objectives. Also, ask him whether there has been any account activity that is contrary to your trader profile. If the manager recognises the problem, request him to make the required changes to solve the problem. 

Check for excessive trading or Churning

Generally, brokers are paid on commission. By this kind of fee structure, a brokerage firm makes more money in fees by proceeding with more overall trades. Frequent trading can quickly fill a broker’s pockets; it is a terrifying technique for any trader. 

It is the legal duty of every broker to guarantee that they are suggesting sensible trades which fit well a more comprehensive trading strategy. Remember, if your chosen broker is trading in your account just to surge their profit or fees, they are doing fraud, and you must take legal action against them to come over for your losses. 

Address Questionable activity instantly 

Delays in reaching a branch manager or a broker about the problems related to the account can lead to falling in the possibility of making a successful claim for brokers fraud and broker misconduct. If you doubt any questionable activity, instantly address issues with branch managers and brokers. You can also present your concerns in writing. 

Close the account 

Last but surely not least, if you figure out brokerage firm misconduct, move ahead by closing your trading account. Find the new broker and take the advice of a professional securities fraud lawyer. 

The Bottom line 

While trading in the financial market one should be vigilant towards the various broker’s frauds because these frauds play with your hard-earned money and eventually leaves you in the worst situation.  

Remember if you are an informed trader, you will never face such a thing. This awareness will come from reading and building a strong foundation on every financial market concept, whether it is selecting a broker or trading strategies. One such trustworthy, well-regulated broker providing the best services with expert assistance is TradeATF.

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