While the vast majority of stockbrokers are honest and ethical, as in any job involving large amounts of other people's money, there are many opportunities for fraud. The consequences of using an unethical stockbroker can include serious financial loss, so you need to be alert and make sure that your stockbroker is acting ethically in all of his business dealings.
One warning sign is your stockbroker recommending investments that seem to be unsuitable for your position. For example, if you are retired and rely on steady income from your investments, you may not want your broker recommending high-risk stocks that could result in large losses. Brokers are required by law to consider their clients' financial needs and not to recommend stocks that are clearly unsuitable. If you feel that you were pressured into buying a stock, or to engage in risky trades, such as buying on margin, then you may be the victim of fraud or unethical practices.
Stockbrokers are not allowed to make trades based on secret information, such as advance knowledge of profit warnings. They must also disclose all risks and other pertinent information when discussing trades with clients. If you feel you were not given important information about a trade, or if your broker claims to have inside knowledge, then he may be unethical. Your broker may also be engaging in unethical practices if he fails to mention the risks of investing in a stock that seems too good to be true -- such as a highly speculative stock.
Stockbrokers who are paid on a commission basis make money on each trade. Therefore, they have an incentive to make as many trades as possible. An unethical broker may buy and sell the same stock several times in order to increase the number of trades he makes, and his commission. This is called churning, or excessive activity. You may not notice it at first, because you will end up with the same amount of stock as before, but it will cost you money in commissions. If you have authorized your broker to make trades without your permission, make sure you look at the activity on your account regularly. Delaying or refusing to carry out an investment order is another form of fraud and unethical behavior.
Another serious type of unethical behavior is selling away. This is when a broker tries to convince you to buy stocks privately, not using his brokerage firm. This occurs most often with private investments – stocks that are not registered with the securities exchange commission or traded publicly. Selling away is illegal as well as unethical. Your broker should also not be advising you to buy stocks in which he has an interest, for example, where your broker claims to also own some of the stock or wants you to invest in a company owned by a friend or family member.
Since graduating with a degree in biology, Lisa Magloff has worked in many countries. Accordingly, she specializes in writing about science and travel and has written for publications as diverse as the "Snowmass Sun" and "Caterer Middle East." With numerous published books and newspaper and magazine articles to her credit, Magloff has an eclectic knowledge of everything from cooking to nuclear reactor maintenance.