Three common types of broker misconduct


Financial markets are constantly in flux, and brokers in Long Island need to make honest and appropriate transactions that ensure their investor’s portfolios continue to be profitable. While most brokers take their obligations seriously and act prudently and with due care, there will be those brokers who will engage in acts of misconduct that hurt investors.

The following are three types of broker misconduct that investors should be aware of so they can take appropriate action if necessary to protect their interests.

1: Churning

A broker churns when they excessively trade an investor’s account as a means of increasing their commissions, with no effort made to increase the investor’s wealth. Trades are churned when they have no legitimate purpose. A high portfolio turnover ratio and an excessive cost-to-equity ratio may be signs of churning.

2: Selling dividends

Sometimes a broker will try to persuade an investor to purchase a specific stock or mutual fund based on the idea that it would generate a profit due to upcoming dividends. Selling dividends occur when a broker convinces the investor to quickly buy a specific stock promising they will make a certain return that actually will not be made at all. The only gains go to the broker, who makes a commission off the investment.

3: Failing to make breakpoint recommendations

Brokers sometimes place a sales charge on specific investments. This is not illegal.

However, sometimes these charges cause investors to pay more than they ought to. Breakpoint sales take place when a person invests a certain amount that has a lower sales charge than other investments. Dishonest brokers, however, may convince an investor not to make a breakpoint sale or may split up the investor’s money among different companies even if these companies have similar services. This way, the dishonest brokers make more commissions.

Hold dishonest brokers accountable

Investors trust that their funds will be handled competently. We expect brokers to act honestly and with due diligence. Sadly, some brokers commit acts of broker misconduct. These types of disputes are sometimes resolved through arbitration while other times litigation in court is more appropriate.