Fraud Proofing: 8 Ways to Know if Your Stock Broker is Legitimate

Data from Chartered Professional Accountants Canada shows that a huge percentage of Canadians fall victim to financial fraud. In a 2022 survey, 46% of respondents stated that they were the target of fraudsters at some point.

Brokers in Canada and across the globe defraud unsuspecting investors every day without detection. Therefore, it’s essential to vet your brokers and investment advisors—and their firms—before you trust them with your business.

Fortunately, vetting brokers is something everyone can do, even if you’re not a financial guru or stock market expert. Here’s how you can determine whether your stock broker is the real deal.

What Does Brokerage Fraud Look Like?

Brokerage fraud comes in all shapes, forms and sizes. But knowing what it can look like is the first step to protecting yourself and your money from unscrupulous brokerages.

One clear example of fraud is a case reported by the Financial Industry Regulatory Authority (FINRA) which led to them permanently banning a former representative of Caldwell International Securities Corp from the industry. The suspect, Richard Adams, performed excessive trading using two customer accounts between July 2013 and June 2014. Adams earned over $57,000 in commission while costing customers over $37,000 in financial losses.

According to the Canadian Government’s official website, citizens also need to be aware of pyramid and Ponzi schemes, boiler room schemes, ‘pump and dump’ tactics, registered retirement savings plan fraud, and forex market scams. All of these are commonly used to separate Canadians from their hard-earned dollars.

8 Ways to Assess the Legitimacy of Your Stock Broker

Use these 8 steps to gauge the legitimacy of your broker and protect yourself from getting defrauded.

1. Avoid Brokers Who ‘Cold Contact’ You

Be wary of any broker or advisor who contacts you in an unsolicited way from a firm with whom you’ve not done business in the past. These brokers often reach out via email, phone calls, or even hard copy letters.

They may use high-pressure sales approaches, offer you “once in a lifetime” investment opportunities, or refuse to send any written information about investments. These are clear signs that they’re not operating with integrity.

2. Do Your Homework

Start researching financial professionals with a basic Google search using the broker and firm’s names. This may be enough to bring up any news articles or reports of alleged fraud or legal action on digital publications or forums.

Next, search the regulatory bodies used by the firm directly. Financial advisors and their firms are legally required to register with provincial and federal securities regulators. All of this registration information is publicly available.

3. Get to Know Your Broker

If you’re searching for a trustworthy financial advisor, you need to speak openly with them about the products, services, and returns on offer. Ask as many questions as you need to about what the brokerage offers and how it’s handled clients who have similar needs and requirements to yours.

Ask about the type of relationship you will have with your advisor, too. Ideally, they should work in line with the fiduciary standard, which dictates that they must put your interests above their own when giving advice or recommending investments. Investment advisors are required by law to follow this standard, but broker-dealers are not, although some of the latter do still adhere to this standard.

If the broker you’re speaking to can’t provide you with any clear answers or seems rushed or under pressure, take your investments elsewhere. If they’re willing to provide the information you need, remember to inquire about fees, rates, and commission percentages that may affect your payouts, profits, or passive income. Registered advisors must also supply you with both halves of Form ADV.

4. Keep an Eye on Your Statements

Investing and forgetting is an easy way to become a target of fraud. Keep an eye on your statements, either in print or online, and take note of any errors immediately. Legitimate brokerages tend not to make errors. But mistakes can happen. How they handle your concerns will tell you everything you need to know about their reputability.

Ask your broker questions if your returns are lower than you anticipated, or if there are any unexpected changes to your portfolio. If they can’t provide any clear answers or you don’t understand their explanation, speak to a professional higher up in the brokerage.

5. Look Out for Suspicious Activities

Fraudulent activity can be subtle, but it’s essential to be able to spot it and recognize it if you want to protect your investments.

If, for example, your stockbroker is known for withdrawing funds from customers’ accounts without written authorization, or refuses to deliver securities or liquid funds into customers’ accounts, you may be looking at an illegitimate and potentially dangerous brokerage. Steer clear! Your broker should never perform any actions relating to your portfolio without your prior written consent.

6. Licensing and Registration

Every single brokerage firm, investment advisor, stockbroker, and investment salesperson must be registered and permitted by law to sell securities to customers. Moreover, every security product they sell must be registered with federal authorities. This applies to traditional brokerage firms and those that offer online stock trading.

If your broker cannot give evidence of this licensing and registration, they may not be operating legally or honestly. Legitimate brokers can provide these documents easily and promptly at your request.

7. Prompt Execution of Orders

If your stockbroker has ever failed to carry out your investment orders in good time, their actions could constitute fraud. Or at least indicate that fraud could take place in the future.

Every broker is legally required to execute your orders as quickly as possible, and cannot refuse to execute an order under any circumstances.

8. Concentration of Investments

Have you ever incurred excessive losses in your portfolio as a result of most of your funds being invested in a single market sector or kind of security? If so, you could be falling victim to over-concentration of your portfolio.

A scrupulous broker will diversify your portfolio. This reduces risk by spreading investments over a range of different industry sectors and stocks while balancing your equities with other classes of investments like forex, commodities and real estate. If your broker puts too much money in one or two specific stocks or industries, this can constitute investment fraud and raise your risk unnecessarily.

When in Doubt, Act Immediately

If you suspect that you may be the target of investment fraud, remove your investments from your advisor immediately. Thereafter, file complaints with your provincial, federal, and local private regulators.

You can also contact your provincial securities commission when in doubt. Each Canadian province has a specialized division that deals with complaints against advisors, brokers, and financial planners. In the unlikely event that you don’t find success with these approaches, you may need to hire a private attorney to have the matter addressed.

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