Investment trick or treat – how to spot a dishonest investment broker

It's the month of October and as Halloween draws nearer we are discussing all things trick or treat. It is, therefore, the ideal time to discuss tactics that dishonest brokers use to trick clients and how to avoid them.

With the right advice and when done correctly, investing can be a real treat by helping you reach your financial goals. However, the opposite applies if you fall prey to unscrupulous investment brokers who try to trick their clients to boost their commission.

In an atmosphere of financial uncertainty resulting from the pandemic and recent social unrest, now more than ever, it is easier to attract unwanted attention from dodgy specialists. Here we look at some dishonest practices that brokers use to trick you out of your financial treat.

1. Churning

Churning involves brokers excessively trading their client's account. This unethical practice is done only for the broker's benefit as the only purpose it serves is to increase the broker's commission, not the client's wealth.

A sign of churning is the unusual increase in transactions that do not benefit the portfolio or if you notice higher fee charges than usual on your transaction history.

2. Downplaying risk

Brokers who only focus on making a sale tend to focus only on how much you can earn in an investment and/or downplay the risks associated with investing. The truth is, absolutely no investment is entirely risk-free, and any broker who says otherwise is probably only trying to secure a sale.

3. Create a sense of urgency

Anyone who has had any experience purchasing a house or apartment will be all too familiar with this technique. Real estate agents ensure that they notify prospective buyers that they aren't the only ones interested in the property and will need to act quickly to secure the house.

Similarly, investment brokers may use phrases like "we need to act straight away" or "this investment opportunity will not be available for much longer", which should be treated as red flags.

4. Investment-ese

To confuse clients into a sale, brokers may throw out hard to understand jargon to give the impression of knowledgeability, experience, or professionalism. It is their responsibility to explain everything in plain terms for you to understand clearly.

These are merely a few of the tactics that dishonest brokers can employ. Therefore, the bottom line is that investors need to remain vigilant regarding their investment. By staying on top of what's happening with your account and by doing your homework when selecting an investment broker, you should avoid these tactics.

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