How to Investigate Your Broker

Your broker might be hiding something…

Last week, the U.S. Securities and Exchange Commission (“SEC”) charged two brokers – James R. Trolice and Lee P. Vaccaro – with stealing more than $6 million from more than 100 investors. The scam – which operated under several different firm names – lasted from 2009 to 2014.

It turns out that the brokers were unregistered.

Brokers are required to register with the SEC and the Financial Industry Regulatory Authority (or “FINRA”) – although there are exceptions to this – before they can legally act as brokers. (States also have their own requirements, so make sure to check with your state’s regulator.)

But not every broker is registered… And if you’re using an unregistered broker, your money is at risk.

The North American Securities Administrators Association (“NASAA”), a voluntary organization that represents the state regulators that help protect investors, reports that the majority of investment-fraud cases reported by state securities regulators involved unregistered individuals or firms.

So before giving anyone money to invest on your behalf, make sure you do a search…

FINRA – a securities regulatory body – provides a valuable service to individual investors with its BrokerCheck tool.

This is a free service that lets you see the disciplinary record of approximately 1.3 million individuals and 21,000 brokerage firms.

To find out if your broker or investment adviser is above board, go to BrokerCheck and enter your adviser’s name or firm, along with your location, then click “Check.”

It will come back with a list of registered advisers, including how long they’ve been in the business, what licenses and designations they hold, and where they’re registered…

Even a cursory “confirmation” of your broker’s licenses can be incredibly valuable…

So your first step should be confirming that your investment adviser is registered. If he’s not, make sure you have full control of your money… immediately. Don’t ever let an unregistered adviser invest your money.

And if you’re opening a brokerage account, make sure that the brokerage firm and its clearing firm (a company that handles transactions between organizations) are members of the Securities Investor Protection Corporation (“SIPC”). This is like insurance that protects you if the firm goes out of business… Your cash and securities held by the firm should be protected up to $500,000. It’s similar to the Federal Deposit Insurance Corporation, which protects bank accounts. But it only protects you if your broker fails financially and is a member of SIPC.

BrokerCheck will also let you know about any disciplinary actions a broker may have faced… and can even give you some insight into any personal financial struggles like bankruptcy or complaints from clients.

For an even deeper look at your broker, you can ask your state securities regulator to do a search for you of the Central Registration Depository (“CRD”), a computerized database. You can find contact information for your state securities regulator on the NASAA website.

Before investing with a broker or investment adviser, be sure to try out FINRA’s BrokerCheck… request your state regulator do a search for you of the CRD database… and do a simple Google search of the broker’s name. You might be surprised at what comes up.

While we know some people prefer using full-service brokers for their investments, we recommend using discount brokers.

If you’re not sure how to get started with a discount broker (or the benefits of using one), we’ll share why we prefer discount brokers on Wednesday.

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