Due Diligence is an essential part of any risky investment.
Higher risks offer higher rewards, but market volatility is already enough to worry about, that stress shouldn’t be compounded by an incompetent or unethical broker using your money for dubious purposes. Bad actors, rotten eggs, troubled brokers, whatever you want to call them—they should be avoided at all costs.
There are laws and regulatory bodies in place that offer protection for investors. But, it’s ultimately up to you to judge the legitimacy of your investments. As a rule, checking a broker for legal and ethical issues is an important way to keep yourself safe.
Troubled Brokers and Dangerous Deals
The goal of a finance professional in charge of managing your money should be to increase your wealth. Sadly, this isn’t always the reality of the situation. Money management firms and brokers may not always have your best interest in mind. In fact, the objectives of your broker may be quite different than you expect.
Worst-case scenarios paint a picture of a broker who’s dug himself into a hole and is desperate need of cash flow. But most cases seem to be associated with good old fashion greed. Enron, Lehman Brothers, Drexel Burnham, MF Global, and countless others have been caught with their hand in the proverbial cookie jar that is their client’s hard-earned money.
Be Careful With Private Placements
The use of private placements or “alternative” investments to mislead investors hasn’t gone unnoticed by regulatory bodies. FINRA and the SEC have been vocal about the use of private placements as the weapon of choice for investment fraudsters. Many small to midsize firms have been pointed out by FINRA for hiring troubled brokers that have a history of using nefarious tactics to sell higher commissions.
If you are advised to invest in a private placement, you better make sure you trust your broker’s abilities of due diligence, as well as their reputation. Below are a number of things you can do protect yourself, including:
- Do as much background research on the company issuing your private placement securities as possible. Think of how you may liquidate these assets if you need to.
- Find out if the person selling you the private placement is registered with the SEC or FINRA.
- Your broker should know the risk factors involved in the issuing company’s business, as well as those of the private placement. Ask them for a detailed explanation of the deal.
- If you hear about a private placement through email or cold calling, hang up the phone or mark the message as spam. These are most often fraudulent.
- Find out if you are buying on a conditional basis or contingency basis. Be careful if there are if there are no contingencies, this is a tell-tale warning sign of a dangerous deal.
Conclusion
One of the most important things you can do is get as much information as you can and have a good lawyer in your corner. Both FINRA and the SEC have a variety of tools and guides to help you avoid investment fraud. As long as you do your due diligence, you should be able to avoid any troubled brokers using shady practices. Your first step to a better bottom line is a click away, contact us to speak with one of our representatives.