How to identify red flags in a broker
Recently, director of Forex Brokers Limited (FBL) Russell Maher was indicted by the SFO (Serious Fraud Office) for scamming clients in Auckland, New Zealand.
The story reminds us that the financial markets are filled with conflicts of interest. Countless forex brokers, many unregulated, lure inexperienced traders in by misrepresenting their services or charging preposterous commissions.
Traders just starting out are the most vulnerable to these tactics. Companies willing to blur the line of ethical practices take advantage of inexperienced traders who aren't well-versed in market conditions (yet).
These unethical practices give brokers and the industry a bad name. Although their dubious practices are largely controlled by more stringent regulatory bodies, they do still exist. So traders have to stay vigilant when they're selecting the broker they want to trade with, and that means learning to spot the red flags signalling a broker could be untrustworthy.
3 signs you're dealing with an untrustworthy broker
As a retail trader, it's important for you to be aware of any suspicious signs from your broker BEFORE opening a trading account with them. Ethical brokers avoid misleading traders. They are transparent and forthcoming. They clearly communicate their regulatory guidelines, warn of the risks involved, and enforce strict measures to protect their traders and partners.
So how do you know if a broker's untrustworthy? Here are the 3 off the tell-tale signs.
- They are unregulated. Regulatory bodies enforce strict rules and guidelines on brokers that help protect your interests. Unethical brokers fall short of complying with these rules and therefore operate without any regulatory oversight. These unregulated brokers expose traders (and their capital) to unnecessary risk. Therefore, always check a broker's website for their regulatory licenses. Trustworthy brokers are usually regulated by at least 2 credited regulatory bodies, and they will display them prominently on their "Regulations" page. You want to see certifications from CySEC (Cyprus Securities and Exchange Commission), FCA (Financial Conduct Authority), or ASIC (Australian Securities and Investments Commission). These are particularly difficult licenses to achieve so any broker regulated by ASIC, CySEC, or FCA is a safe choice.
- They don't show up in forex directories and review websites (or other popular trading websites that list authenticated brokers). Credible brokers are listed in forex directories to promote their services and make sure anyone looking for them can easily find them. These directory/review sites also provide sections for traders to get insight into the quality of services brokers provide, by reading peer user reviews. Most of these sites are legitimate however, there are a few unethical sites that either post fake negative broker reviews and demand payment, or unsubstantiated positive reviews for a price. To make sure you don't stumble on one of those sites check to see if the page promotes forex news site/education resources but has a long list of forex broker reviews on their homepage. If it does, then the site probably profits by listing fake reviews.
- You can't easily get in touch with them (or they don't respond for days). Ethical brokers respond to you quickly. They provide dedicated support from expert traders and are easy-to-reach and always available to provide valuable knowledge when you need it. Unethical brokers will say they have expert support, but many don't actually have the resources to support that claim. So when you're choosing a broker it always pays to reach out to them by email, chat, and phone to see how long it takes them to respond on each channel. That's usually a good indication of how available they'll be for you when you're trading with them.
The Bottom Line
As a trader or investor, you have the power to choose a broker who not only offers you the best trading environment and resources but also operates with integrity, within an ethical operational framework.
To make sure you're choosing a trustworthy broker, first, make sure they're regulated. Regulators enforce strict regulatory guidelines on a broker's operations that protect your interests. Second, check to see if they're listed on credible directory and review sites. And lastly, make sure they're available when you reach out to them, and that when they do, they provide friendly and knowledgeable support.
This article was submitted by Royal.