Practice Areas

Red Flags: Signs of Broker Misconduct

Let's say that you've been a cautious investor and mindful of your portfolio. But, still, something about your account doesn't feel right. Something seems to be amiss, but you can't put your finger on it.

Here are some things to look for:

Unsuitable recommendations: Your broker has a responsibility to recommend investments based on your investment needs and goals, and your appetite for risk, if any. If you don't want to make investments that place your principal at substantial risk of loss, they shouldn't be recommended to you. For example, elderly people living on fixed incomes should not have a lot of their money put into risky investments, structured products, non-traded REITs, or other investments that don't provide ready access to funds if needed for an emergency.

Unauthorized trading: A stockbroker is not allowed to buy or sell securities on your behalf without your prior authorization, unless you specifically grant them the authority to trade at their own discretion. Many brokerage firms will not even allow their financial advisers to undertake such discretionary authority. Neither is he or she allowed to purchase more of the securities you order. For example, when you agree to purchase 1,000 shares of stock, your stockbroker should not purchase 1,100 shares. Review your statements upon receipt to ensure there are no unauthorized transactions.

Churning: This involves trading an account excessively for the sole purpose of generating commissions for the broker. Be on the lookout for repeated recommendations to buy and sell securities. The transactions costs can add up quickly and negatively impact your account's performance more than you may expect.

Unauthorized accounts: A stockbroker may not without your express authorization open up an option, margin or any other type of account for you. This activity often involves forgery or misrepresentations about the nature of such accounts, and is a huge red flag to watch out for.

Unauthorized use of margin: Margin is borrowing funds from the brokerage firm, usually to invest in more securities. Stated simply, you are borrowing money to invest. The broker-dealer charges interest on the money you borrow; and if the value of the securities in your margin account drops, the firm has the right to sell out your entire account to protect its capital. The use of margin increases the risk of the account and is generally not appropriate for retired investors who want to minimize their risk of loss of principal. Review your periodic account statements. If you see a negative cash balance, you are on margin, that is you owe that money to the firm and are paying interest on the amount owed.

Sudden losses/high volatility: The stockbroker must disclose all material information, including the risks of the investments he or she is recommending. Concealing the true risk of an investment, misstating facts about an investment (like it is 100% protected against loss of principal); or failing to disclose, i.e., omitting material information (i.e., the company is insolvent or has not earned a profit in the past three quarters) are examples of misrepresentations and omissions. These are often reflected is sudden losses or large swings in the value of the investments.

Always Save And Review Your Statements

To discover if your broker has engaged in these or other unlawful practices, you must examine your monthly statements for unauthorized transactions, excessive trading, or a sudden drop in value. You should save your statements for easy reference and comparison over time.

Contact Our Kentucky Attorneys If You Have Suffered Due To Broker Misconduct

If you want additional information on how you can protect yourself and your portfolio, or if you believe you have suffered from stockbroker misconduct, call our lawyers toll free at 859-554-0495 or contact us online for a free consultation. From our Lexington offices, we provide representation to people throughout the country.