There is nothing like the thrill of that first tangible investment for a new investor. You’ve made wise financial decisions, saved up your funds, researched ahead, and now you’re ready to let your money work for you.
- Investing for the first time can be exciting and overwhelming, under a deluge of information.
- Protect your money by staying vigilant, identifying certain moves that could mean your broker is committing investment fraud.
- Try to avoid fraud with specific tactics at the beginning of the process.
Investing often means working with a brokerage firm or a particular financial professional who handles your investments. This broker is the person you trust not only with all you’ve built up to that point but often with your future. Yet, as you begin to work together, something feels off. As a first-time investor, you might not know why, and an untrustworthy broker could take advantage of that fact.
It’s essential to trust your gut, though, and if you think your broker isn’t properly handling your money, you could be a victim of investment fraud. Learn what to look for as a first-time investor to ensure you aren’t being subjected to fraud, how to avoid it, and what to do in response.
How to spot investment fraud
There are specific things to look for with your investments and your broker, which can often be red flags indicating fraud. Your financial professional is likely counting on you not knowing enough about the process to miss these concerns, but if you take time to learn them and remain vigilant, you can head off fraud before it snowballs out of hand.
- Confusing statements: The brokerage firm works for you and should be expected to present information in a digestible form. It could be purposeful if your broker shows you dense and confounding statements. If you walk away from a meeting knowing less than you did going in, begin to look for other red flags.
- Unauthorized investments: Your broker should never make an investment that isn’t approved. Sometimes, that means providing general direction and trusting their judgment, such as investing within a particular field or range, but they should stay within those parameters. If you notice transactions on your statements outside what you approved, it could be a sign of fraud.
- Pressure for high-risk investments: You should never be pressured into investing in areas you aren’t comfortable with. Particularly as a first-time investor, your broker should lead you through smaller, low-risk investments to test the waters, learn what you like, and how you want to use your money further. If the broker continues pushing you into higher-risk options, they could receive kickbacks or mismanage your funds.
- Capital gains tax not measuring up to known investments: The IRS will collect capital gains taxes on your investments. If tax season rolls around and you owe more than you should or are paying those taxes while working at a deficit, your broker likely made fraudulent investments and hid them from you.
- Hiding important information: While you should be able to trust your broker, they earn and return that trust by being transparent. There is implied communication involved when it comes to certain decisions, and if they are gate-keeping information, however mundane, that is a red flag that something could be hidden.
- No communication: To reiterate, your broker works for you. So, if they ignore phone calls or other forms of communication, they could be avoiding you to hide fraud.
How to avoid investment fraud
Unfortunately, fraud isn’t completely avoidable; there is always a chance something could be mishandled—intentionally or not—and jeopardize your finances. However, you can do a couple of things ahead of time to lessen the risk.
First, shop your business around before deciding on a broker or brokerage firm. They may want to review your portfolio to see if you are a good fit for their firm, but you should be researching and interviewing them just as much. Ask for credentials, track records, client reviews, and a detailed breakdown of their process.
Secondly, don’t be swayed by the promise of significant gains. As a first-time investor, starting slowly and building your portfolio with low-risk investments can be smart.
What to do if fraud occurs
If you find yourself the victim of fraud, there are protections and options to recover your investments. This is done through FINRA (Financial Industry Regulatory Authority) arbitration. Research investment fraud attorneys to find the one you trust and who is licensed to try FINRA arbitration cases, and they will work to recoup your losses.
Conclusion
Your investment portfolio is a testament to your hard work and your plans for the future. As a first-time investor, don’t let anyone take advantage of your funds. Stay attuned to your portfolio, broker, and instincts to protect that investment.
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