Central and South American investors often open brokerage accounts in the United States because of political and economic instability in their home countries.
But if you are considering investing in the United States, you should be aware of the significant risk of stockbroker misconduct. You should understand the role of a broker and the different types of broker misconduct.
Let’s face the truth handing over your hard-earned money to someone else is scary. When I first started investing I worried constantly about whether my broker was trustworthy. And guess what? Those concerns weren’t completely unfounded.
Even in 2025, broker fraud still exists and threatens investors’ money The financial landscape has improved since the Great Recession, but risks remain. That’s why I’ve put together this comprehensive guide to help you verify if your broker is legitimate and protect your investments
The Reality of Brokerage Fraud: A Recent Example
Before diving into protection strategies, let’s look at a real-world example that shows these risks aren’t theoretical.
In a recent case, the Securities and Exchange Commission (SEC) charged Raymond J. Pirrello Jr. Marcello Follano, Robert Cassino, Anthony DiTucci, Joseph Rivera, and their companies for orchestrating fraudulent schemes related to pre-initial public offering (IPO) companies.
These defendants allegedly:
- Used unregistered sales agents
- Solicited over $528 million from more than 4,000 global investors
- Promised no upfront fees while secretly imposing undisclosed markups
- Funneled over $88 million in illicit profits to themselves
Pretty scary, right? This happened right in New Jersey and New York, not some distant location.
6 Essential Steps to Verify Your Broker’s Legitimacy
1. Be Extremely Cautious of Cold Contacts
One of the biggest red flags is when a broker or investment advisor contacts you out of the blue from a company you’ve never done business with before.
Watch out for these warning signs:
- Unsolicited phone calls, emails, or letters
- Investment seminars promising free lunches or gifts
- High-pressure sales tactics
- Claims of “once-in-a-lifetime” opportunities
- Refusals to send written information
Remember, you have rights when receiving cold calls. The SEC has established rules that legitimate brokers must follow:
- Calls can only occur between 8:00 a.m. and 9:00 p.m. at your home
- Callers must identify themselves and their purpose
- They must honor requests to be placed on a “Do Not Call” list
If these rules aren’t followed, that’s your first clue something might be fishy.
2. Ask Your Broker the Right Questions
Before handing over your money, you need to feel completely comfortable with the people who’ll be advising you. Don’t be shy about asking questions!
Essential questions to ask:
- What experience do you have with clients who have similar needs to mine?
- Do you follow a fiduciary standard or just a suitability standard?
- What are your rates, fees, and commissions?
- Can you provide both parts of Form ADV? (for investment advisors)
The fiduciary vs. suitability standard is super important. Under a fiduciary standard, financial professionals MUST put your interests above their own. That’s much stronger than the suitability standard, where they only need to make recommendations that are “consistent” with your interests.
Investment advisors always follow the fiduciary standard, but broker-dealers don’t have to (though some will agree to).
If the broker seems rushed or unwilling to give clear answers, that’s a huge red flag. Just walk away!
3. Do Your Homework on Your Broker
Don’t just take their word for it – do your own research.
Start with these simple steps:
- Do a basic web search of the broker and firm name
- Look for news releases about disciplinary actions
- Check client conversations on online forums
- Research their background information
Then, dive deeper by searching regulatory agencies directly. All legitimate financial professionals and their firms MUST be registered with federal and state securities regulators.
Check these sources:
- State securities regulators: They have information on licensing, registration, and disciplinary actions
- FINRA’s BrokerCheck: An excellent source of information about brokers and their firms
- SEC’s Investment Advisor Public Disclosure (IAPD) website: Contains details about registered financial advisors, including Form ADV
Never hire an investment advisor without reading their entire Form ADV. It’s like their professional biography with all the good and bad parts included.
4. Verify SIPC Membership
Make sure your brokerage firm is a member of the Securities Investor Protection Corporation (SIPC).
The SIPC protects investors for up to $500,000 (including $250,000 for cash) if a firm goes bankrupt – similar to how the FDIC protects bank customers.
Important safety tip: Always make checks out to the SIPC member firm, never to an individual broker.
Some brokerages offer additional insurance beyond SIPC limits, which is fine and normal. This extra coverage might protect against losses exceeding SIPC limits or cover investments not included in SIPC protection (like commodities or futures contracts).
5. Check Your Statements Regularly
One of the worst mistakes I see investors make is putting their investments on autopilot. Don’t do that!
Review your statements carefully every month, whether online or in print. This helps you catch potential wrongdoing or mistakes early.
Red flags to watch for:
- Investment returns that don’t match expectations
- Surprise changes in your portfolio
- Transactions you didn’t authorize
- Complicated explanations you don’t understand
If something seems off, speak up! Ask questions, and don’t accept confusing answers. Never worry about looking ignorant or being a nuisance – it’s YOUR money.
Technology has made this easier than ever. Most brokerages offer:
- Mobile apps for real-time account monitoring
- Online portals accessible through web browsers
- Electronic access to portfolio data
- Performance comparisons
The SEC has published numerous guides to help you not only select but maintain your relationship with your broker. Take advantage of these free resources!
6. Take Action if Something Seems Wrong
If you suspect wrongdoing, don’t just sit there worried – take action!
Here’s what to do:
- Remove your funds from the investment advisor immediately
- File complaints with state and federal regulators
- Contact any charter organizations the professional belongs to
If your complaint is against a stockbroker, file a dispute with either the SEC or FINRA. Many financial professionals are members of charter organizations (you can tell by the abbreviations after their name), which have their own standards and codes of ethics.
For example:
- Complaints against Certified Financial Planners (CFPs) can be filed with the CFP Board of Standards
- Issues with Chartered Financial Analysts (CFAs) should be reported to the CFA Institute
Your state or provincial securities commission is another great resource. Each has a division handling complaints against brokers, advisors, and financial planners.
If all else fails, hiring an attorney is your final option.
Common Questions About Broker Safety
Can You Really Trust a Broker?
Licensed brokers who commit outright fraud are relatively rare because of the extensive verification systems in place. However, there are other risks:
- A broker might recommend investments that benefit them more than you
- They could use your money in their accounts for their own purposes (like obtaining margin)
- They might shore up their own financial books with your funds
How Do I Know If a Forex Broker Is Legitimate?
For forex brokers specifically:
- Ask for their Retail Foreign Exchange Dealer (RFED) number
- Check with the National Futures Association or the Commodity Futures Trading Commission
- Search their name online – previous victims rarely stay quiet!
How Do I Find Out If a Broker Is Registered?
Most investors use FINRA’s BrokerCheck to verify registration and legitimacy. It shows:
- Which investment advisors work at the firm
- What securities they’re authorized to deal in
- Any professionals barred by FINRA from practicing
Can Brokers Steal Your Money?
Yes, they absolutely can – though it’s not common. What happens more frequently is brokers steering you into investments that benefit them more than you, essentially gambling with your money in ways they wouldn’t with their own. This is why regularly reviewing your statements is crucial.
The Bottom Line: Trust but Verify
Even though we’re years past the Great Recession, broker and advisor misconduct still happens. Do your due diligence before working with ANY financial professional.
Monitor your accounts regularly to ensure returns match expectations and to catch unusual activity early. If something feels wrong or your concerns aren’t addressed satisfactorily, don’t hesitate to withdraw your funds to protect your investments.
Remember: It’s YOUR money, and YOU have the ultimate responsibility to protect it.
Duties Brokers Owe to Investors
Brokers owe certain duties to customers, which include:
- recommending only investments that are suitable;
- acting in the customer’s best interests and putting those interests ahead of their own;
- informing the customer of all material facts about recommended investments, including the risks;
- not misrepresenting any material fact about an investment; and
- transacting business only after obtaining prior authorization.
If a broker breaches these duties there can be devastating financial consequences. Many brokers are honest, well-qualified, and trusted professional advisors. However, some brokers engage in improper conduct.
Improper conduct includes making unsuitable investment recommendations, churning or excessive trading, misrepresentations and omissions, and unauthorized trading.
Types of Broker Misconduct
A broker must understand a particular customer’s “investor profile” prior to making an investment recommendation and must make only those recommendations that are consistent with that profile. The profile includes the customer’s age, income, net worth, tax status, investment experience, risk tolerance, and investment objectives.
An unsuitable investment recommendation, for example, might be a recommendation of volatile, risky stocks to an elderly or conservative investor rather than conservative interest-paying bonds, such that the investor’s money is at risk of being depleted to the point where the customer can no longer meet living expenses.
This is also known as excessive trading. One red flag for churning or excessive trading is when a broker buys and sells securities repeatedly in a short period of time, without regard for the customer’s best interests.
Since the broker often generates commissions per trade, he or she has engaged in improper self-dealing and makes it very difficult for the customer ever to realize a profit.
Brokers are obligated to disclose (and not omit) all material facts about recommended investments. A material fact is one the investor would consider important in making an investment decision. Misrepresentations and omissions frequently concern the lack of disclosure or improper disclosure of the risk of making a certain investment.
A broker must obtain the customer’s prior approval before making a trade. Even with prior approval and written discretionary trading authority, the broker still must invest assets consistently with the customer’s investor profile. Investors can bring a claim to recover losses resulting from unauthorized trades.