What are the possible signs of fraud or other misconduct in your account?  Here are some potential red flags:

  • Big drops in the value of your portfolio, particularly when these dips don’t follow the market or seem exaggerated in comparison to what the market is doing.
  • Under-performance of the portfolio compared to the market. While there may be a perfectly benign explanation for this, it can also be a telltale sign of misconduct, including unsuitable investments, high commission investments, and other misconduct which benefits the broker at the investor’s expense.
  • Up the ante – the original.  Your broker recommends an investment strategy that makes you uncomfortable, particularly if the risk is more than you desire or inconsistent with what you have told the broker.  We’ve all acted against our better judgment in getting a bad haircut, unflattering sweater, or unsavory dinner special.  Do not make the mistake of accepting an investment recommendation that runs counter to your gut.
  • Up the ante – the remix.  Your broker recommends the purchase of a security that requires you to sign new account paperwork changing your risk tolerance to a higher level. In a nutshell, if your risk tolerance is moderate, then you must really question a recommendation which requires you to change that tolerance on paper to “aggressive” or “speculative.” That is, if the firm has earmarked an investment as “aggressive” or “speculative,” then there is a reason why it was not meant for a moderate risk investor.  Don’t let you broker persuade you otherwise.
  • Lots of trading.  Even a modest mathematics student understands that at some point the cost of making transactions outweighs the possible reward of those transactions, even under the best circumstances. When a broker engages in excessive trading in an customer’s account without regard to the customer’s investment goals and primarily to generate commissions for the broker, then the broker may be engaged in an illegal practice known as churning.

  • Portfolio concentration in a single security, sector of the market or asset class.  Diversification is the key to spreading risk, and should be implemented in conjunction with your risk tolerance and investment objectives. Also, beware of the same thing, different label strategy. For example, strawberries, grapes, oranges and apples are not the same, but all are fruit.  A portfolio concentrated in fruit – no matter how diverse that fruit – is not the same as a portfolio diversified between fruits, vegetables, proteins, and starches.  Don’t let someone sell you a bushel of apples or a fruit basket when you should be getting a food pyramid.
  • Your broker is evasive or non-responsive. Everyone these days is busy and possibly inundated with voice mails, text messages, and emails.  However, if your broker fails to respond to your query – or multiple queries – in a timely manner you must really question what is going on with the relationship between you and your financial advisor.  Similarly, if management fails to respond to your concerns, then you should strongly reconsider the entity and individuals with whom you are dealing.
  • Your broker touts a trade or strategy as “risk-free” or “guaranteed.”  Every investment carries some degree of risk, and the greater the potential for reward, the greater the risk.  You should be skeptical of any investment that is said to be risk free.  You also should be wary of any guarantee as those often come with caveats or qualifiers which certainly do not mean guaranteed in the general understanding of that word.
  • Unauthorized transactions. Unless you have given your broker formal written authority (aka discretion) to make investments on your behalf, then he/she must confer with you regarding each transaction.  Simply telling your broker that he/she “can do whatever you like with my account” is insufficient to confer discretionary authority upon your broker.
  • Transactions erroneously marked “unsolicited.” Generally, unsolicited means that it was the investor’s idea and that the investor requested the broker make the transaction.  In contrast, a solicited transaction is a trade transaction where the registered representative contacts the client and initiates the buy or sell.  Unsolicited transactions generally are subject to lessor scrutiny by the broker’s supervisors, which means the broker may mark transactions as unsolicited to avoid scrutiny and hide misconduct.  If you see this error in your confirmations and/or account statements, discuss it with your broker so you can determine if it’s a simple mistake or the tip of the iceberg.
  • Margin recommendations. Margin basically means borrowing against the value of a securities account through a line of credit from the firm, which is then used to purchase additional securities.  Investors generally use margin to leverage their investments and increase their purchasing power.  Such trading, however, exposes the investor to higher risk for potential losses.  For example, if the margin ratio in the account exceeds the firm’s requirements, then the investor will receive a margin call requiring the investor to either inject more money into the account or the firm will force a sale of the investor’s securities, which locks in the investor’s losses.  In sum, when you see the word leverage you should be thinking “exponential increase of risk.”
  • Switching between variable annuity contracts. While variable annuity switching is not per se fraudulent, there often are substantial hidden costs to the investor, such as: changes in surrender charges and/or bonuses received; loss of existing living/death benefits; increased annual costs; increases in the surrender charge period; and diminished product features, amongst other things.   Annuities are complicated contracts, which are difficult not only for the investor to understand, but also the broker.  One thing remains constant, however:  the broker typically earns a generous commission as a result of the switch.  Therefore, you should view askance a recommendation to switch your variable annuity, because while it might not cost you anything out of pocket to sign the paperwork for the switch, it can cost you dearly in terms of features and benefits for your annuity.
  • Pressure sales tactics and the “time is of the essence” sales pitch. Handling one’s investment portfolio is a great responsibility.  Proceed at your own pace.  Do your due diligence.  Don’t fall for the pushy salesman’s lines:  “This is the real deal”; “I know how you feel”; “Think about what this means for your family”; “This is a one-time offer”; “I own this” (or “I’d sell this to my mom”); and “Here’s a little token of our appreciation.”