Red flags to spot broker misconduct


Stock trading is a highly regulated industry. Brokerage firms have several compliance methods in place to assure you that your money is being invested both wisely and legally. That said, it is possible for some misconduct to slip through the cracks.

It is important to have a trusting relationship with your broker. He or she is a party to your trades and, in some instances, may be in control of thousands of your dollars. For that reason, it is crucial that your broker is operating both under your recommendations and within the law.

If you become suspicious that your broker isn’t fulfilling his fiduciary requirements, there are a handful of red flags to keep an eye out for.

Unsuitable recommendations

The recommendations that your broker is supposed to give you are typically based on your financial situation. From this point, he or she will assess your investment needs and your interest in risky stocks and provide you with options that fulfill these goals. Simply, your broker is responsible for showing you options that make sense for your specific situation.

If your broker decides to take control of your situation and begins recommending stocks that, for example, are considerably riskier than you are interested in, this may be a red flag for broker misconduct. You can avoid this by keeping an eye out for recommendations that are averse to your investment strategy.

Unauthorized trading

Unauthorized trading is a very simple red flag to spot. Simply put, your broker cannot make a trade without your explicit authorization. He or she cannot buy or sell any amount of stock on your behalf other than the amount you specifically authorized.

Pay attention to your portfolio and be wary of excuses for any trades made that you didn’t give authorized consent for.


Churning is one of the most common examples of stock broker misconduct. It occurs when a broker asks the client to make trades often in order to make a more significant commission. There are occasions when making a high number of trades in succession is in your best interest, but this could also be a scam by your broker to generate more income off commissions.

If you notice that you are making a lot of trades and not seeing much change in your portfolio, this may be a sign that your broker is violating his fiduciary obligation to you.

Misleading the facts

This example of misconduct is simple to understand but may be challenging to spot, especially if you trust your broker. The simple explanation is that it is unlawful for your broker to make any untrue statement of material fact or actively choose not to disclose pertinent information that has the potential to mislead the client.

Noticing this example of broker misconduct may be difficult, however. Be cautious of key phrases such as “confidential information” or personal testimony like “my buddy knows someone”, as these may be strong indicators of an attempt to mislead material facts.

Stock trading can be an extremely beneficial way to supplement your income, but it’s important to be mindful of broker misconduct. If you suspect misconduct, it’s important to seek legal help.