The Dangers of Online Trading via Unregulated Broker
Financial markets are full of fraud and unscrupulous individuals, making it difficult to know whom you can and cannot trust with your money. It seems that each and every day there is a news story about some new Ponzi scheme or broker that recommends a company as a great investment, even though that company is days away from failure. With such news stories circulating, many individuals that are not currently involved in investment activities are refusing to start.
Fortunately, the Financial Conduct Authority (FCA), the Securities Exchange Commission (SEC) , the Financial Industry Regulatory Authority (FINRA) and more regulators are in place to ensure that improper trading is kept in check and that investors that do fall for fraud have potential to recover their losses. Unfortunately, those who choose to trade with unregulated brokers could find this much more difficult, and should that broker lose money for those individuals, there are few remedies for recovering losses. Overall, trading with an unregulated broker is dangerous, and it simply is not worth the many risks associated with it.
Conflict of Interest
When an individual becomes a registered broker, he or she must abide by certain rules, and should these rules be violated, penalties will ensue. One of these rules includes avoiding a conflict of interest. There is a plethora of ways that conflicts of interest can arise, but one of the most common ones in the financial world is when a firm or broker receives greater fees from one product and therefore recommends that product regardless of the investor.
Another way that conflict of interest can arise would be if the broker has an affiliation with the financial product he or she is selling and recommends it because it will lead to other gains beyond the commission. These are not the only two possibilities, but they both show the risk. When using a registered broker, these conflicts must be avoided, and if they are not, the broker could be fined and the investor could recoup his or her losses. When using an unregulated broker, a conflict of interest will simply go unanswered, resulting in the investor losing significant amounts of money.
Anti-Fraud and Anti-Money Laundering
Online trading is already risky enough, but the lack of these two safeguards puts the prospect in an even more frightening context. Regulated investing includes safeguards to protect against fraud and money laundering. By working with an unregulated broker, you are bypassing these essential safeguards and opening up yourself to a world of risk that shouldn’t be there.
Beyond the rules and safeguards that are in place for registered brokers, every broker must also carry insurance on his or her investments. In other words, if a broker does break these rules or give advice without performing due diligence, then the consumer can recoup his or her losses. Naturally, if the loss was a result of poor decision making, or if the consumer entered into a risky investment fully aware of the risk, this would not be the case. Still, this protection does a great job of keeping individuals safe from unscrupulous behavior.
This safeguard simply does not exist among unregulated brokers. These individuals have no authority to answer to, and therefore will usually not have any insurance or guarantees. In some cases, these brokers might claim to have a guarantee or safety net in place, but should something go wrong the consumer is left high and dry. Ultimately, what this means to the investor is that there is no accountability for an unregulated broker, and paired with all of the other oversights, it makes trading with these individuals a very dangerous game.
Of course, there are other considerations when looking at an unregulated broker as well. As with the above rules, there are many other guidelines that a regulated broker needs to follow. For starters, brokers are required to look at each individual client and assess his or her needs. This includes factors such as: risk tolerance, investment goals, age of client, etc.
An unregulated broker does not need to follow these rules and presents a serious issue for the investor. Whether you believe that humans are inherently good, bad or simply human, there is something to be said about following a standard of rules. For unregulated brokers, this standard of rules does not exist and the temptation to cut corners will take over at one time or another. If the lack of face-to-face time doesn’t bother you with normal online trading, think of how detrimental it can be when dealing with someone who is unregistered as a broker.
Perform Your Own Due Diligence
Just as a registered broker must perform due diligence before recommending an investment product to a client, you must also perform your own due diligence before selecting a broker. This includes verifying that he or she is registered with the proper regulating authorities. The reality is that not all unregulated brokers are going to be bad, but probability is not in their favor.
If someone is truly wishing to make an honest living in the brokerage business, he or she will take the time to get properly licensed and work with a proper brokerage firm. By finding the right broker who will really look out for your needs and goals, you can assure that your investments are well protected. Avoid the risk of working with an unregulated broker, and find someone you can truly trust.