5 Broker Behaviors That Should Raise a Red Flag

Slideshow September 22, 2023 at 09:34 AM Share & Print

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The Financial Industry Regulatory Authority is warning investors to be wary of certain behaviors by their brokers that should raise a red flag — and could result in an enforcement action.

While “most registered financial professionals are trustworthy individuals who act with integrity,” FINRA states, “unfortunately, some are not.”

The broker-dealer self-regulator urges investors to use BrokerCheck to research any broker they’re thinking of working with and to “keep an eye out for signs of misconduct.”

See the gallery for five questionable behaviors by brokers that should be warning signs to investors, according to FINRA.

Melanie Waddell

@Think_MelanieW

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1. Asking for a Personal Loan

FINRA rules prohibit registered financial professionals from borrowing money from their customers except in certain circumstances, such as if the customer is a family member.

“Unfortunately, such situations often come to FINRA's attention only after the individual has failed to repay the customer or an estate discovers the existence of a loan,” FINRA states.

Brokers seeking personal loans “will also typically instruct investors to transfer funds from their brokerage account to their personal bank account before loaning the funds in an attempt to evade firm detection,” according to FINRA.

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2. Selling Promissory Notes

“A promissory note is a form of debt that companies sometimes use to raise money,” FINRA explains. “Bona fide notes are marketed almost exclusively to corporate and accredited investors. While they can be legitimate, high-risk investments, many promissory notes sold widely to individual, non-accredited investors are fraudulent.”

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3. Using Personal Email or Text Messages

As FINRA points out, firms are required to monitor, capture and retain advisor-client communications.

“FINRA often finds that registered financial professionals who use personal email or other off-channel means of communication not compliant with firm policies do so to circumvent the firm’s review for compliance with important investor protection rules and regulations,” the regulator says.

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4. Sketchy Fund Transfer Requests

FINRA advises investors that if they’re investing through an account at a particular financial firm, they should make all deposits directly to the firm — and double check that they have the right firm name and deposit information.

If a broker “pitches an investment that requires you to write a check to them or a third party, proceed with caution and verify with the firm that this is in fact its protocol. It could be a sign of fraud or that the financial firm doesn't approve or sanction the investment,” FINRA states.

FINRA states that it “permanently bars registered financial professionals who it finds have instructed customers to write an investment check to a fraudulent account and then taken their money.”

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5. Requesting to Become a Beneficiary

“With limited exceptions, FINRA rules prohibit registered financial professionals from being named a beneficiary of a customer’s estate or receiving a bequest from a customer’s estate,” FINRA writes. “Likewise, they cannot hold a position of trust such as executor, trustee, power of attorney or similar position for or on behalf of a customer unless certain conditions are satisfied.”

Holding such a role could create potential conflicts of interest for the broker and could affect the investment recommendations they make.

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