While investing and trading are great ways to grow your wealth, they also come with quite a few risks along the way. Aside from the innate risk of losing money due to market price fluctuations, there is another significant risk one should consider: the risk of falling victim to a broker scam.
According to data compiled by Scamadvisor, the worldwide losses due to scams is estimated to exceed €50 billion in 2020, while in many countries, investment scams is a leading online crime category. As the public interest in trading and investing in many countries has grown significantly since the start of COVID-19 epidemic, broker scams pose increasing risks to the inexperienced and unaware.
To help you avoid falling into the traps of investment scammers, we will be taking a look at the top 5 scams you should be aware of when choosing a broker.
1. Excessive/Hidden Spreads, Fees, Commissions
The bread and butter of most brokers is charging you by way of increased spreads, fees and commissions. However, some unethical brokers will charge you much more than a typical broker and try to conceal that fact. This may be done by misrepresenting information on spreads, commissions and fees which, at the first glance, all seem to match that of leading competitors. However, in reality, the actual pricing information is withheld from clients.
While an experienced trader may be able to spot such a scam, new traders are likely to fall right into it for a prolonged period of time.
2. Stop-Loss Hunting
Market manipulation is one of the hardest-to-prove, and yet one of the most profitable scams unethical brokers use to grab their clients’ money. As the broker can access its clients’ trading information, it can then set up certain market moves that will force traders to close their positions automatically, via hitting their stop-loss orders. This causes unnatural short-term volatility in the market and leaves many traders in the red.
While it’s notoriously hard-to-prove, a great way to protect yourself from this scam is to read reviews of the broker you are about to trust your money with. Don’t shy away from searching for more information about your broker of interest on objective financial review platforms like Investimonials. This will allow you to gather specific details on the broker in question which might save you money and headache.
It is common for brokers to offer trading ideas as a way to encourage you to make trades. Although that is a valid way to add to your trading repertoire, some brokers take it a few steps further and offer trading signals. This usually is an additional, and sometimes an exclusive service offered for an extra fee on a subscription basis. While it would be unfair to call every signal-seller a scam, it is definitely worth approaching such offers with healthy skepticism.
Oftentimes, such signal-sellers make claims which, for some, are just as hard to resist as they are unrealistic and untrue. Such brokers will often have well designed landing pages filled with great-looking graphs which illustrate stable, rising profits. Don’t be fooled by the glamor and cleanliness of such websites, as very often they merely serve the purpose of luring you into a trap.
Such unethical brokers will tweak and apply profit-counting techniques to their benefit, to make a losing strategy appear profitable.
4. Robo Advisors
Similar to signal-sellers, many robo advisors claim they have programmed an algorithm which is able to beat the market consistently, on autopilot. They will often make things as simple as possible, so that practically anyone, even with no knowledge of the markets, can participate and invest in such a deceitful scheme.
Common claims will include the learning and adapting nature of the algorithm. Since it is able to learn, it is only a question of time when you will recover your losses and turn profitable. That is a comfortable way to make you believe you should not withdraw your funds and continue investing.
5. Extraordinary/Guaranteed Returns
In 2008 Bernie Madoff was finally arrested for a major investment scandal, as he built a fraudulent investment pyramid scheme worth billions of dollars. As owner of the fund, Bernie offered extraordinary returns to his existing investors, funded by fresh cash inflows by new investors.
Smaller versions of such a scheme exist and come about in retail trading as well. Oftentimes, they even offer a guaranteed return on your investment which is “too good to turn down”. It is best to take such offers with skepticism, as investors often find the broker will simply disappear along with their capital.
We have touched upon 5 broker scams which are rather common in the world of investing. While this list is not definitive, and every year unethical brokers are finding more creative ways to scam people, this should not deter you from reaching your financial goals.
Despite the potential downfalls, prior due diligence can protect you from falling into a trap, and once you’ve found a broker you can trust, investing your money reasonably can be a very worthy decision.