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Brokers Gone Wild (Part 1)

If you haven’t believed me yet, please believe me now.  You are in danger; danger from your stockbroker, danger from a broker you haven’t yet met, danger from friends and family who fall prey to such a broker and convince you to follow them.  Over the next week or so, we will follow the course [...]

If you haven’t believed me yet, please believe me now.  You are in danger; danger from your stockbroker, danger from a broker you haven’t yet met, danger from friends and family who fall prey to such a broker and convince you to follow them.  Over the next week or so, we will follow the course of how the obliteration of a nest egg begins and how it ends. 

Hear me, please:  There are more ways in which you can lose what you’ve worked for decades to save than we could cover in a year’s worth of daily posts.  We are focusing on only one common scenario, in which your stockbroker sells you a cleverly-disguised scam.  We’ve chosen this scenario because thousands of brokers will soon be unemployed and, desperate for income, selling scams.

It begins when your broker hears of an investment opportunity that is paying higher than average returns.  He might hear of the opportunity from another broker, from a customer, or through a solicitation from the ‘investment’ promoter.’  The investment will usually guarantee a minimum return or guarantee preservation of principal, or both.  But it isn’t usually the higher returns or the guarantee of safety that draws your broker - it’s the higher commissions.  His calculation is simple.  He could continue to call you to try to convince you to buy stocks, one at a time, and earn a certain amount on each trade, or he could convince you to invest in this new investment and earn a commission equal to what he would earn in three years of such calls.  Your broker is a salesman; which do you think he will choose? 

Now, if he works for a brokerage firm, he knows full well that he is not allowed to sell investments that are not approved by the firm.  He may submit the investment for approval.  I have seen such scams formally approved for sale by brokerage firms.  In most cases, though, the firm will deny the broker permission to sell the investment.  He then has a choice to make: (1) refuse to sell it and forego the big commissions, (2) resign from the firm so that he can sell the high commission product, or (3) sell it under the table.  Through almost twenty years of protecting investors, I have never seen a broker choose option one or two.  He cannot resist selling something that pays such a high commission.

An experienced broker, though, understands that his firm will not approve the sale of the new investment, and that asking for approval will only alert the firm to his interest in the investment, which will, in turn, result in his branch manager keeping him under a microscope, looking for evidence that he is selling it despite having been denied approval.  The broker will therefore not ask for permission, and will try to keep the sale of the investment a secret from his firm.  He will not tell you that, of course.  You will believe that the firm stands behind him.  You will sleep soundly, believing that, if a firm as big and well-known as XYZ is behind this investment, they must have investigated it and found it to be legitimate. 

That’s how it begins.  In our next post in this series, we will address the features of the most dangerous type of scam, and how the broker will present the investment to you.

 

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