Dishonest Investment Broker Tactics

One downside to investing is the possibility of dealing with a dishonest brokerage firm. While the Securities and Exchange Commission (SEC) does a good job of monitoring and regulating brokerages, there are some dishonest people in this profession. Consumers shouldn’t let that fact discourage them from investing; there are dishonest people in most professions. The fact that there are dishonest car salesmen doesn’t stop you from buying a car; you just do everything you can to be sure you’re not getting taken for a ride. There are dishonest plumbers in the world, but you still call one when you’re facing a broken toilet. You just do everything you can to make sure you’re not getting flushed down the tubes. Knowing what to watch out for is the key to not getting ripped off by any dishonest professional, so following are some practices that a dishonest investment broker may engage in.


Churning is the practice of trading a client’s account excessively and unnecessarily. It is done to increase a broker’s commissions and results in little or no real gain for the client. A telltale sign that your account may be being churned is a marked increase in the number of transactions without any increase in the value of the portfolio.

“Dividend Selling”

Brokers are engaging in dividend selling if they encourage clients to buy a specific stock or mutual fund based on dividends due to be paid. While this sounds like good advice to the uninitiated (“buy Coca Cola right away, they’re paying a $2.00 per share dividend two months from now”), such advice that leads to a trade does nothing for the client while creating a commission for the broker. The client will find that the stock price is reduced by the amount of the dividend when it is traded ex dividend (meaning that the dividend in question belongs to the seller rather than the buyer) and the dividend is actually now a tax liability for the investor.

The best ways to avoid these brokerage tactics is to deal with a brokerage firm that is known as respected, and to investigate any brokerage firm before agreeing to use them. You can also consider opening a wrap account with your broker. In a wrap account situation, the broker services and manages your portfolio for a flat fee, rather than a commission. This makes both of these practices unprofitable for the broker since there is no commission involved.



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