Make sure you are working with a reputable financial professional before entrusting them with your hard-earned money. A legit stock broker will have no issues providing you with any information required to verify their license. Unregistered brokers are frequently behind investment scams, and in those cases, our securities lawyers cannot help you get your money back. Investors who lose money after investing with unregistered brokers will have to file a report with the Securities and Exchange Commission as well as law enforcement, and recovery is not always possible.
- Learn How to Check a Broker License
There are a few simple steps to check your stock broker’s license. In many cases of broker fraud, an unregistered broker has spoofed a real broker’s identity. A thorough review of a FINRA BrokerCheck profile can help you weed out imposters.
BrokerCheck is a database maintained by the Financial Industry Regulatory Authority (FINRA). FINRA has regulated brokerage firms and their representatives since 2007 and issues fines and suspensions to brokers who engage in misconduct.
Regulation Best Interest requires that your brokerage firm provide a Form CRS. Form CRS discloses information about the firm’s conflicts of interest, as well as information about how firms compensate their brokers. Form CRS will reveal whether the brokerage firm or its associated persons have disciplinary records, although the form does not specifically disclose the allegations. Investors can ask their brokers for this information but should also review their BrokerCheck profiles themselves. Investors should know that brokers are not necessarily fiduciaries, unlike SEC-registered RIAs. (Read more about the differences between broker vs. investment adviser duties.) There are exceptions to this rule, as in the case of trust brokers.
How to Check if Your Broker is Legit, Step by Step:
- Ask your broker for their Central Registration Depository number (CRD number).
- Look up the number in FINRA’s BrokerCheck database.
- Make sure the information provided by your broker matches the information shown on their profile. Name, location, and member firm should all be exact matches. (Sometimes a firm will provide brokerage services through a brokerage of a different name. The name of that brokerage firm should appear at the bottom of the advisory firm’s website.)
- Review their Examinations and Licenses. Your broker should be licensed to sell securities in your state, and if they specialize in special securities products like options or variable annuities, their exams should reflect that expertise.
Note: Financial professionals who are only registered as Registered Investment Advisers (RIAs) do not have profiles on BrokerCheck. You can find their information in the SEC database, called the Investment Adviser Public Disclosure (IAPD).
2. Know the Red Flags
Make sure you know the red flags of a bad trader. Carefully review any disclosures that appear on their record, especially Regulatory Actions and Customer Disputes. Only a small percentage of brokers have repeat misconduct allegations on their records.
Any criminal charges or financial disclosures, such as tax liens or bankruptcies, will also appear on their BrokerCheck record.
You can look up brokerage firms on BrokerCheck as well. To review firms’ regulatory actions, click on the “Detailed Report” button in the upper right-hand corner of their profile.
3. Do Your Due Diligence
Research investments on your own. Call your state securities regulator and ask about a particular investment. Read the prospectus that describes the investment, paying special attention to the “Risk Factors” section.
If you’re asking yourself, “How to know if a broker is legit?” it also never hurts to enter a potential broker’s name into a search engine, along with their brokerage firm’s name and/or their location.
4. Be Wary of Cold Calls and Scammers
Real stock brokers will not call you without any pre-existing relationship to solicit you for “once-in-a-lifetime” investment opportunities. Often, these callers will use high-pressure sales tactics and discourage you from taking time to do your own research on the investment. Always reject these types of solicitations.
Any investment that features no risk and potentially huge rewards should arouse your suspicion, no matter who is behind the solicitation.
Beware of Fake/Unregistered Brokers
Do not take brokers at their word when they claim to be legitimate financial professionals. Many scammers may include “broker” as part of their job description, as in the case of recent merchant brokers group scams, also known as merchant services scams. Merchant brokers can provide legitimate services for businesses, but they have nothing to do with the securities industry and will not contact you to solicit you for an investment.
Is Trading Legit?
Generally speaking, trading by following your gut instincts is a losing strategy. Experts generally agree that investor portfolios perform better when investors invest in a diversified portfolio with an appropriate level of risk for their financial situations. For instance, younger investors may want to take on more risk since they have time to bounce back from any major downturns, while seniors looking for retirement income should stick to low-risk stocks.
There are, however, risks associated with any trading, even if you are working with a financial professional. Trustworthy brokers will only recommend investments that suit their investor’s needs. These are some of the investments that come with higher risk as well as higher commissions and other incentives for brokers. All too frequently, brokers put their own financial interests ahead of those of their customers and recommend these overly risky investments.
Instead of searching “Is [trade] legit?” online, ensure the investment is actually registered with the SEC. Companies that trade on public exchanges are required to register with the Securities and Exchange Commission, and you can find their ticker symbols in the regulator’s EDGAR database.
Can a Brokers Steal Money?
Unfortunately, yes. Brokers may steal investor money outright – often using a Ponzi scheme. In cases of elder financial abuse, brokers have persuaded senior investors to open a shared account or to make their broker a beneficiary of their estate.
These are just a few of the ways legitimate brokers may keep their clients’ money for themselves:
- Other, more subtle forms of broker misconduct might involve a broker executing an excessive number of trades to increase their commissions, in spite of the fact that too many transactions result in unfair fees for the investor.
- Especially brazen investors may make unauthorized withdrawals from an investor account, forging documents and changing the recipient of account statements to obscure their misconduct.
- Reverse churning occurs when an investment adviser does not execute trades in a managed account but still collects their fee.
- Brokers may simply misrepresent overly risky investments for the sake of the attached commission, leaving their clients out to dry when the investment tanks.
- Brokers are supposed to have authorization to trade at their own discretion. Unauthorized trading is a violation of FINRA Rule 3260.
Common Broker Frauds
Certain types of investments frequently turn out to be instruments for fraud. When investors see advertisem*nts for these types of securities or receive cold calls soliciting them for investments, they should be especially suspicious.
Cryptocurrency
The SEC alleges that scammers defrauded investors out of $2 billion through investments in a lending program offered by a cryptocurrency platform called BitConnect. The fraudsters behind the scheme allegedly told investors that a “volatility software trading bot” would invest their money for them and generate strong returns. Promoters extolled the virtues of this strategy on social media, another commonly seen tactic in cryptocurrency scams.
Prime Bank Investments
The SEC also recently issued a warning regarding “prime bank” investments. These investments are all fraudulent. They may also use the guise of a “high-yield investment program,” which is another term for a pyramid scheme. According to the SEC, when potential investors ask for information the scammers state that they need to keep certain information secret to protect the integrity of the investment.
Can a Forex Broker Steal Your Money?
Scams involving forex brokers – both licensed brokers and scammers masquerading as qualified brokers – have used the pretense of forex trading to steal money. According to a recent SEC action, 17 individuals used promises of high-return, low-risk foreign exchange and cryptocurrency investments to operate a $300 million Ponzi scheme. The SEC alleges that this scheme had thousands of victims. Instead of investing the money as promised, the charged individuals kept the money for themselves, occasionally making fraudulent payments to investors to make it seem as though the fake investments were generating a return.
How Can I Avoid Forex Trading Scams?
Ensure you are working with a registered broker using a legitimate trading platform – preferably one regulated by the SEC or the Commodity and Futures Trading Commission (CFTC).
What Can I Do If I Lost Money After Working with a Dishonest Broker?
Investors who are wondering, “How to check if a broker is legit?” probably already have a sense that something has gone wrong with their investments. Even if you do your research before investing, it is still possible to lose money after working with a legitimate broker. If you believe you lost money due to broker fraud or misconduct, contact Kurta Law for a free case evaluation. Kurta Law securities attorneys do not charge a fee unless they win your case and there is a limited timeframe for filing claims, so do not hesitate to reach out. Call (877) 600-0098 or email info@kurtalawfirm.com.
