How to Verify the Trustworthiness of an Online Brokerage Firm

Verify if your Brokerage Firm is Lawful

While selecting a broker, trust is the most substantial factor. Since you entrust your money to them, you need to be absolutely certain your online broker is rightful, reliable, legit, and straight as an arrow. How will you find out that your broker is not the next Bernard Madoff? When you do a little research and answer the following questions, you will check if your broker can be trusted. 

1. Is your brokerage registered with the Securities and Exchange Commission (SEC) or Financial Conduct Authority (FCA) in the UK?

Legitimate and licensed brokers are required by law to register with the SEC or the FSA in the UK. You can check if your chosen broker is registered in the Central Registration Depository (CRD) which is a computerized database. It keeps registration records on brokerage firms including filings, employment, qualification, or education. You can also scrutinize any disciplinary actions taken against the target brokerage firm because this database provides all disclosure histories and even fingerprint submissions. If you take an interest in the objective and impartial information to build a full picture of a brokerage firm, the CRD is a real treasure trove of information. The SEC generally regulates brokerage firms and investment advisers that have assets under management exceeding $100,000,000. The firms that do not meet this level are regulated by the state securities authorities. 

2. Is your broker registered with the Investment Adviser Public Disclosure (IAPD)?

The IAPD provides information about not only state-registered and SEC-registered investment adviser firms, but also certain Investment Adviser firms that are exempt from registration with the SEC. Generally, the IAPD is the equivalent of the CRD for individual brokers and investment advisers. 

3. Is your brokerage firm a member of the Financial Industry Regulatory Authority (FINRA)? 

The FINRA goal is to oversee the market and provide broker-dealers and investors with collaboration on a level playing field. It should be clearly visible on the brokerage firm’s website, usually, at the bottom of the page, that it is a member of FINRA. It is possible to check out brokerage firms on FINRA's BrokerCheck website.

4. Is your brokerage firm a member of the Securities Investor Protection Corporation (SIPC)? 

If your brokerage firm goes bankrupt, the SIPC protects all investors whose brokerage firms are members of the SIPC. It protects the cash and securities up to $500,000 including up to $250,000 protection for cash in your account to buy securities. SIPC provides investor protection to over 3,500 securities brokerage firms that are SIPC members. To make sure if your brokerage firm is a SIPC member, you can quickly check it on the SIPC members’ list.

5. Is there any additional insurance guaranteed in case the brokerage firm fails? 

When a firm is a member of the SIPC, it has insurance with a per-customer limit of at least $500,000, with $250,000 available for cash claims. If a brokerage firm applies the Customer Protection Rule, it should also provide additional coverage other than required by the SIPC.

6. Are deposits on checking or saving accounts covered by the Federal Deposit Insurance Corporation (FDIC)? (if the brokerage firm offers any deposit products)

Generally, investment products such as stocks, bonds, annuities, and options are not insured by the FDIC. However, when the brokerage firm offers checking accounts, saving accounts, CDs, or Money Market Deposit Accounts (MMDAs), they should be fully covered by the FDIC.  

7. Is there any investor protection against fraud? 

Will the company provide you with any reimbursement for losses resulting from fraud? Get your facts right about what the requirements of your brokerage firm are to reimburse you for any losses. Learn what precautions you need to take and what documents you need to have to be qualified. 

Identify the Account Protection and Online Security on the Brokerage Firm’s Website

Online investing is very convenient. You can check your brokerage account at any time of day or night, or even sell and buy securities within seconds, but online investments are related to some risk resulting from cybersecurity. If you don't protect your privacy, you can become a victim of identity theft and lose money. To safeguard your privacy and money, you need to know the answers to the following questions which will keep you safe from cybersecurity threats. 

1. Is there a two-factor authentication on the brokerage firm’s website?

As there has been a massive increase in cybercrime in recent years, you should be aware of potential financial losses. The after-effects of stolen credentials may be devastating. Your investment account may be hacked,  your identity may be stolen, and your brokerage account can be drained overnight. That is why it is so important to find out if your brokerage firm offers tighter security than just a password. First, you enter your username and your password, but you can’t get immediate access. You need to provide another piece of information. Two-factor authentication is that extra level of security that can save you from a serious headache. 

2. Does your brokerage firm offer you the option of activating a security feature except for your password?

Two-factor authentication gives you additional protection, such as receiving time-sensitive and unique codes via text or email or answering security questions. By using 2FA, your brokerage firm makes sure that you are the only person who can log into your brokerage account.

The second factor of authentication can come from the following categories:

• Something that only you know: a password, an answer to a secret question, a personal identification number, or a keystroke. 
• Something that only you have: a smartphone, a hardware token, or a credit card.
• Something that only you are: an iris scan, a pattern of your fingerprint.

With two-factor authentication, even if your password is stolen, the odds of someone else acquiring your second-factor information are very unlikely. 

3. Does the brokerage firm’s website have an SSL certificate?

Learn how the brokerage firm protects your brokerage account and what technology it uses to transfer data and keep your account secure. Make sure your broker uses encryption and all data transfers are made over SSL (secure socket layer). It is the preferred method used while dealing with sensitive information such as passwords, financial information, social security numbers. The green padlock in the address bar of your brokerage firm’s website is the confirmation of a secure socket layer method.

4. Does your brokerage firm sell customer information to third parties? You should make sure that your brokerage firm sells neither your personal data nor financial data.  

Reputation

1. What online reviews does your brokerage firm have?

All trustworthy companies care about their good name, so it’s worth finding out what their current customers are saying about them online. It is obvious you should take online reviews skeptically, but there is always a grain of truth in them. While searching for online reviews, use keywords such as “fraud”, “fraudster”, “insurance claim”, “cheat”, or “scam”. If you track down reviews with the same complaint, you should look into them.    

Conclusion

Legitimate and licensed brokerage firms answer all your verification questions without mishap. They are open, honest, and have nothing to hide As they understand your concerns, they want to make things easier so they simplify your verification process to ease your mind. However, if you notice any signs of difficulties in getting answers to your questions, that is a big red flag. It is better to look for another brokerage firm.