• Skip to primary navigation
  • Skip to main content
  • Skip to primary sidebar

Wealth Pilgrim

No Money Worries. No Matter What.

Neal Frankle featured in
  • Home
  • Life Insurance
  • Investing
    • Build Strong Investment Building Blocks To Avoid Going Broke In Retirement
    • Systematic Mutual Fund and ETF Investing
    • Stock Market Investing Guide
    • Choosing the Right Investment Brokerage Guide
    • How Bonds Work Guide
    • How Banks Really Work Guide
    • Annuities – What You Need To Know Before You Invest
    • A Beginners Guide To Buying Individual Stocks
    • Create A Pool Of Great Mutual Funds and ETFs To Pick From To Secure Your Retirement
    • ETF and Index Fund Investment Guide
  • Earn More
  • Banking
  • Retirement Planning
    • Retirement Guide
  • Ask Neal a Question
  • Reviews
    • Upgrade Personal Loans Review
    • Lending Club Review
    • Prosper Review
    • Ally Invest TradeKing Review
    • CIT Bank Review
    • LegalZoom Review
    • Lexington Law Review
    • Airbnb Host Review
    • Should You Drive For Uber?
  • Tax
  • Courses
    • Raise Your Credit Score So You Can Buy a House – Free Video Course

How to Have Investment Safety In Your Brokerage Accounts

by Neal Frankle, CFP ®, The article represents the author's opinion. This post may contain affiliate links. Please read our disclosure for more info.

Investment safety is top of mind for investors these days as well it should be. In the an era of Bernie Madoff and MF Global investment scandals , investors must rely on themselves to make sure that everything is above board and they don’t incur fraudulent investment losses.

How do you make sure your brokerage accounts are safe? Of course there is no 100% guarantee but there are several steps you can and should take:

1. What’s in a name?

Just because a brokerage firm is generally regarded as reputable doesn’t mean it is. Do I need to remind you that Bernie Madoff (King Rat) was the former chairman of the NASDAQ stock exchange? As a result a great deal of trust was automatically bestowed upon this weasel. Enough trust to allow him to steal billions and billions from investors.

Jon Corzine is the former CEO of Goldman Sachs and of MF Global. He was also the 54th Governor of New Jersey after he was elected Senator from the same state. Quite a resume. Those credentials reasonably qualified Mr. Corzine as a trustworthy fellow. Yet as CEO of MF Global Inc, one of the largest firms that specialized in the futures market, the firm went bust. I’m not saying that Jon Boy is a thief of course. The courts will decide that matter. But MF Global clients are missing over $1 billion and he has no idea where that money went. Sorry…that dog just does not hunt if you ask me.

So the first rule to keep your money safe is to stay awake and ask questions no matter who you are dealing with. When people ignore this rule, they painfully learn the top reason why investors lose money.

2. Find out how the firm makes its money.

There are several ways stock brokers make money. Most make money on commissions and fees when you make investments. They have to make money somehow. If you insist on working with a commission broker, only work with brokerage firms that earn money this way and this way alone. At least these firms don’t have any interest in you buying one investment over another.

But some firms create their own mutual funds and ETFs and earn fees on these investments too. These firms have no objectively. They want you to buy their products. Why would you ever trust such a firm to make investment recommendations? I wouldn’t.

While I suggest that you refrain from working with such firms, having their own investment products doesn’t give them an easy way to steal from you. There are far more dangerous activities that some brokerage firms engage in that you should look out for.

First, if you don’t understand how a brokerage firm makes its money don’t trust them with your hard earned savings. Bernie Madoff’s firm posted high returns year after year yet nobody could explain how they did it. As it turns out, there was a good reason why they couldn’t explain it….Bernie wasn’t really making those profits. He was just playing a Ponzi game with investors’ money. Eventually, most everyone got hurt.

Other firms (like MF Global) trade on their own account and this is referred to as “proprietary trading”. If they are very aggressive and make the wrong investments they can run up huge losses. If that happens the firm could try to dip into the cookie jar – your cookie jar – to try to make up for those losses. Don’t open an account with firms that trade on their own account.

3. Take a look under the hood

You can check out your broker and your brokerage firm at the Financial Industry Regulatory Authority – FINRA. Had investors taken a look there before investing with MF Global for example, they would have seen no less than 35 problems. Most of those were reports by the Futures Trading Commission (the regulatory body the overseas firms like MF Global). The FTC audit found sub-standard supervision and poor record keeping practices.

The firm had real problems with failing to supervise a rogue trader who accumulated huge losses for the firm. Other incidents included multi-million dollar hedge fund losses that were concealed from investors for years. But both of these issues were in plain sight of any investors who checked the FINRA site. And had they done so it would have given most reasonable investors reason to pause before opening an account.

To be fair even high quality firms have occasional regulatory exceptions. Remember that brokerage firms and custodians deal with millions of customers and billions of transactions. No matter how straight they play, there is bound to be a few ruffled feathers and an occasional law suit. The trick is to find out what regulatory problems the firm has and how significant those problems are. You do that by first finding out what the problems are and then you ask questions.

4. Where is your firm headed?

Only deal with publicly traded brokers and read their financial statements and shareholder letters. Is the firm interested in proprietary trading (a risky endeavor)? Are they growing quickly? How?

Taking these four steps will help you avoid big problems. The bottom line is to basically do a little due diligence, ask questions and don’t invest if the answers don’t make sense to you.

Did you lose money with MF Global? Have you lost money in other brokerage scams? What happened and what would you do differently today?

Tweet
Pin
Share

Reader Interactions

User Generated Content (UGC) Disclosure: Please note that the opinions of the commenters are not necessarily the opinions of this site.

Comments

  1. yvonne orona says

    April 11, 2021 at 11:29 AM

    I feel I am being scammed my monies went to a interactive account advisor which is Sec, infra active but the advisor iam working with is not listed he is but says PR on both broker n on advisor. What do I do he’s still trying to convince me there’s nothing wrong …I can’t even access my account I got a statement n don’t even understand it.if u can help me pls respond ty. All my earnings that I worked hard for.

    Reply

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

Are You Human? * Time limit is exhausted. Please reload CAPTCHA.

Primary Sidebar

Who is Neal Frankle

Neal Frankle

I'm a CERTIFIED FINANCIAL PLANNER™ Professional with more than 25 years of experience. I feel very blessed and hope to share my personal financial experience and professional wisdom with readers of WealthPilgrim.
Read More »

Stay Connected

Facebook Twitter YouTube RSS

More Categories

Career Development
College Funding
Credit Cards
Credit Score Fixes
Money and Marriage
Debt Relief
Estate Protection
Property Investment Loans
Small Business Strategies
Spend Less Money

Disclaimer

Wealth Pilgrim is not responsible for and does not endorse any advertising, products or resource available from advertisements on this website. Wealth Pilgrim receives compensation from Google for advertising space on this website, but does not control the advertising selection or content. Please do the appropriate research before participating in any third party offers. The information contained in WealthPilgrim.com is for general information or entertainment purposes only and does not constitute professional financial advice. Please contact an independent financial professional for advice regarding your specific situation. Wealth Pilgrim does not provide investment advisory services and is not a registered investment adviser. Neal may provide advisory services through Wealth Resources Group, a registered investment adviser. Wealth Pilgrim and Wealth Resources Group are affiliated companies. In accordance with FTC guidelines, we state that we have a financial relationship with some of the companies mentioned in this website. This may include receiving payments,access to free products and services for product and service reviews and giveaways. Any references to third party products, rates, or websites are subject to change without notice. We do our best to maintain current information, but due to the rapidly changing environment, some information may have changed since it was published. Please do the appropriate research before participating in any third party offers.


About · Contact · Disclaimer & Privacy policy

Copyright © Wealth Pilgrim 2022 All Rights Reserved