The Securities and Exchange Commission (SEC) and Philippine Association of Security Brokers & Dealers Incorporated do a fairly good job policing and regulating brokers.
Regardless, the best way for investors to avoid dishonest brokers is to find a trusted stock broker with a good track record. Nevertheless, sometimes the most thorough background check for a firm, broker or planner doesn’t always prevent falling prey to fraudulence.
In this article, we look at some of the ways brokers take advantage of investors and the system to boost their commissions or push bad investments onto unsuspecting investors.
Churning. Through this, a stock broker excessively trades a client’s account. Many brokers with discretionary authority over a client’s account make use of this unethical practice to boost their commissions. Churning generally benefits the broker rather than the investor since the only goal of the trade is to increase commissions and not the client’s wealth. Even one trade can be considered churning if it has no valid purpose.
One warning sign of churning is an unusual increase in transactions without gains in a portfolio’s value.
Selling dividends. Here, a broker tries to convince the client to purchase a particular investment such as stocks or mutual funds due to an upcoming dividend, which is referred to as dividend selling. The broker is trying to acquire commissions via a quick and easy gain.
This practice is also present in mutual funds where an advisor will tell a client to purchase a fund since dividends are being paid out by companies in the fund. Much like the stock price, the mutual fund’s net asset value is actually discounted by the value of the dividend, which results in a gain only for the broker through commissions.
Withholding recommendation to invest at breakpoint. Many brokerages and mutual fund companies utilize sales charge on certain investments. While these sales charges are not really illegal, the sales charges cause investors to pay more than they should. For instance, if a mutual fund company charges 5% if the investment is under $25,000, but only charges 4% for investments of $25,000 or more. Breakpoint sales occur if you invest at $25,000 since at this amount your investment is in a lower sales-charge bracket.
Unscrupulous advisors may recommend that you invest $24,950 into the fund to preserve their sales even though you would save $450, in sales charge by investing $25,000. Advisors may also keep you from getting the benefits of breakpoints by splitting your money into different investment companies, even though these companies offer similar services. This turns to more commissions for the advisor and fewer savings to you.
Inappropriate transactions
We’d like to highlight the meaning of “unsuitable transactions,” to sum up the nature of all these practices. It is a general term for investments made in a manner not consistent with the client’s conditions or investment goals. Your broker is duty-bound to know your financial needs and constraints and to ensure that investment recommendations are sound.
End Note
Regardless of your financial background, it is vital to maintain focus on your account. Of course, this doesn’t mean that you need to review your account daily, but it’s wise to check in regularly to know its status. Only transact with reliable and investor-trusted companies with stock broker professionals such as Easter Securities Development Corporation (ESDC). Doing this along with a full examination of a broker’s investment proposals will ensure that you’ll avoid most types of broker fraud.
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