When to Change Stockbrokers
A stockbroker is a person who buys and sells stocks and securities on behalf of his clients. Full-service stockbrokers also offer financial and investment advice. Since a stockbroker can be authorized to use his best judgment on behalf of a client, many have great control over the client's finances. In light of this fact, it's especially important to be vigilant of your stockbroker's practices.
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Identification
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Stockbrokers are required to pass two separate licensing exams before they're allowed to work for a brokerage house. Successful completion of the exams affords brokers the ability to sell their brokering services, offer investment advice and make transactions on behalf of a client. It's important to remember that a stockbroker is essentially a salesperson---she receives a commission when a stock is bought or sold through her service.
Significance
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Understanding when it's time to change stockbrokers is vital to protecting your money. A broker who intentionally provides misinformation to a client may be committing stock fraud, a highly illegal practice in which the broker's unethical and dishonest behavior result in financial loss for the client. This type of behavior includes lying about stock prices to obtain larger commissions or to embezzle money; overstating the potential financial gain or risk of a specific stock; and not honoring a client's request to sell or buy specific stocks.
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Warning
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Some deceitful stockbrokers engage in churning, and will act in their own best interests when trading stocks on behalf of a client. That is, they may buy or sell stocks without regard to the client's best interest, or even time the purchase or sale of a stock with the intention of obtaining larger commissions for themselves. Brokers who work for major firms have also been known to falsely inflate stock prices by releasing false tips or information to the public to obtain larger commissions. One major indicator of this practice is when your broker calls you often to suggest buying or selling stocks. Another sign is if the broker suggests that you quickly sell a lower-return stock even though you've recently purchased it on his advice.
Features
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Stockbrokers are sometimes given written permission to make stock trades for their clients without notifying the client in advance. Otherwise, each trade requires consultation with the client. Unethical stockbrokers may engage in "unauthorized trading," or making trades without notifying the client when notification is required. Then, when the client questions the unauthorized transaction, these brokers try to convince the client to keep the trade in place---usually persuading him by promising significant profit. This is a red flag, indicating that the broker may be making other unscrupulous decisions with your money.
Prevention/Solution
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If you're concerned about your stockbroker's ethics or behavior, there's probably a reason. Take the time to thoroughly review your monthly statements, and check a broker's credentials before you hire her. Don't choose a broker who cold-calls you---instead, seek one. Seasoned and reputable brokers don't cold-call clients. Working with a reputable brokerage house can decrease your risk, but don't assume you're safe just because a broker is employed by a company you know. Google a potential stockbroker before you hire him. Lawsuits and judgments against the broker are public record, and an Internet search can alert you to any problems in the broker's past. The good news is that if you are a victim of stock fraud, legal assistance is available. In many cases, clients are able to recoup their losses.
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Resources
- Photo Credit Image Credit: Svilen Mushkatov/sxc.hu
