How to Know if Your Broker is Legit?

Following post was contributed by Justin Weinger

Is your broker an ethical businessperson who works for a licensed, registered firm? If you value your financial health, you had better make sure. Even in this age of doxxing, it pays to spend an hour or so checking out the background and reputation of any company to whom you will be transferring large sums of money. There are some unscrupulous players out there, but in all fairness to the industry, there aren’t nearly as many as there used to be. It’s also important to remember that every sector of the economy has its bad apples, so it’s always wise to do your research before choosing a brokerage firm. Here are some easy and effective ways to weed out the potentially unsavory entities as you begin your search for an investment advisor or broker/dealer.

Membership in SIPC/CIPF

Make sure any broker you use is a member of its national investor protection organization. In the U.S., it’s the Security Investor Protection Corporation, and in Canada, it’s the Canadian Investor Protection Fund. The operate to protect your account balance if the brokerage goes out of business for any reason. Note that these organizations do NOT protect you from losing money on investments you make. Additionally, remember to never write checks or convey funds to a broker personally. Always write checks to the firm, or convey electronic deposits directly into the brokerage company’s account. Every regulated forex broker in Canada and the U.S. should be a member of one of these organizations. If they are not, don’t use them.

No Suspicious Behavior or Requests

Beware of anyone who asks you to do something out of the ordinary with your funds. That includes, but is not limited to, a request to write a check to an individual instead of the firm, suggestions that you place money into a secret or off the books account, or promises that you can make extraordinary profits on any investment. In all, whatever feels suspicious to you falls in this category. Legitimate financial professionals don’t make secret deals, offer guarantees of profit, or maintain separate accounts of any kind.

Clear, Simple Monthly Statements

Examine your monthly statements closely. Even if you had an especially slow month and the document is short and boring, spend time looking at all the charges, fees, etc. If you see anything you don’t understand, call the representative and ask about it. This is something you should do even if the amounts seem small. Some of the world’s biggest financial scams involved taking tiny amounts of money from thousands of clients at a time. It’s easy to ignore an apparent over-charge of one or two dollars during a month in which you did thousands of dollars’ worth of trades. Don’t ignore such discrepancies because they can be signs of much larger problems.

Willingness to Meet for Discussion

Before hiring a licensed broker, investment advisor, or dealer, request to meet in person, over the phone, or via online video chat for at least a half-hour discussion. During the talk, ask all your questions and try to get a feel for how it might be to work with the person long-term. Warning signs include:

  • Delaying setting up a meeting
  • Avoiding certain topics during a discussion
  • Poor response to the questions you’re asking

Didn’t Contact You Via a Cold Call

Never hire a brokerage firm or any of its representatives if they contact you over the phone via an unsolicited cold call. You should be the one to do the choosing. In the last half of the 1900s, cold-calling was the primary way that many legitimate firms found customers, but those days are over. Ethical companies don’t seek to build their client base by making random calls to individuals. Beware special offers and new customer discounts that the cold-callers offer when they ring you up. Simply say, “Take me off your call list,” and then hang up. Do not engage them in conversation. Chances are, they are not even connected to a licensed firm at all.

Has Positive Reviews and Comments

Just as you’d research consumer reviews for a bicycle or new car you planned to purchase, check out prospective brokers to see what kind of online reputation they have. Red flags to look for include:

  • More negative reviews than positive
  • No online presence at all
  • Pending legal claims against the company or its principals
  • Recent name changes and/or multiple location changes

There’s a lot you can find out by checking legitimate review sites, but be careful not to rule a firm out based on a single bad review. Competitors often post fake reviews to torpedo rival firms.

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