Recently, an Australian Australian Broker was fined $425,00 by the Australian Securities and Investments Commission (ASIC) over suspect trading that was performed over 5 years ago. The matter has now reached the courts. The $425,000 fine was for two alleged breaches of market integrity rules.
With cases like these appearing in the news, it can make investors and traders uncomfortable with using stockbroking firms. Although the vast majority of brokers are not like this, it is important to be wary of potentially unscrupulous stockbroking firms. Here are some questions you should ask your broker and yourself, to determine if they are unethical or not:
Does The Broker Have A Reputable History as a Fiduciary?
Checking the background of a broker is important to find out if they have any previous complaints, or black marks against their name. You can avoid a potential costly financial mistake by simply doing so. Depending on your region, you should be able to check with your government’s financial regulatory authority to find out the history of a stockbroking firm.
In the United States, you are able to do this by looking at BrokerCheck from FINRA.
Do They Recommend Unsuitable Investments?
Brokers are supposed to recommend investments that are suited to your risk profile. If they are recommending you high risk investments, when you are nearing your retirement and are relying on income from your investments, then this could be a warning sign.
Since brokers are required by law to recommend investments according to their client’s personal situation, if they recommend stocks that are clearly unsuitable, you could be the victim of unethical practices.
Do They Use Inside Information?
Stockbroking firms are not allowed to place trades based on inside information, such as potential profit downgrades or profit increases. Also, all risks and relevant information must be disclosed to clients when they are discussing potential trades. If your stockbroking firm claims to hold inside information with relation to trading a certain stock, or if he withholds information about how risky a certain investment is, then he may be unethical.
Do They Undertake The Practice of “Churning”?
Since stockbrokers are paid a commission, they make their money by placing trades. For this reason, they are incentivised to make as many trades as they possibly can. A broker who is unethical may continuously buy and sell the same stock several times in order to maximise the amount of commissions that he makes. This practice is referred to as “churning” and is a way of creating excessive trading activity for the purpose of increasing commissions.
Be sure to check the activity on your account, especially if you have given permission to act on your behalf when making trades. Another way that they may be unethical is by delaying a trading order, or refusing to undertake a trading order.
Do They Undertake the Practice of “Selling Away”?
Another unethical practice that an unscrupulous stockbroking firm might undertake is “selling away”. This is where you purchase stocks that are not listed on a public exchange, as a private investment. Often, it isn’t performed through the brokerage firm they work for either. It is an illegal practice, since a broker cannot sell you a stock in which he has a personal interest in. For example, if they own a part of the company they are selling stock to or if a family member or friend owns a part of the same company.
What Are Their Certifications?
Depending on your country, there are certain education and registration requirements before becoming a stockbroker. Also, there could be a difference in the level of a stockbroker’s knowledge. In the United States, the minimum requirement often just involves paying a fee and filling out a form, which is not reassuring for some investors.
This is why it is important to see if they are Series 7 licensed (in the United States) and also if they hold other certifications. For example, check if they hold Certified Financial Planner certifications.
If you are unaware of these unethical practices, then you could be taken advantage of when deciding on a stockbroking firm. However, by familiarising yourself with these items above, you will be able to spot a potentially unethical stockbroking firm and prevent yourself from being taken advantage of. A reputable stockbroking firm to consider is CMC markets.