If you get a cold call from a broker

May 23, 2003

Not all investment pitches from strangers are scams, but you'd best be alert.


If you get a cold call from a broker

A unfamiliar broker calls with a hot investment tip. You're intrigued, but leery. How can you tell whether the caller and his proposal are for real?

First, pay attention to the details. Telephoning strangers and asking them to invest isn't illegal; in fact, it's how rookie brokers from respectable firms get clients. But securities regulators do impose certain rules.

Brokers must call only between 8 a.m. and 9 p.m., at your office or at home. They must give their name and their firm's name, address, and telephone number. Brokers must also disclose that they're calling to sell you investments. They can't threaten you, try to intimidate you, or use obscene language, nor can they call repeatedly and harass you. And they must add your name to the "do not call" list every brokerage is required to maintain if you ask them to. If your caller breaks any of these rules, you'd best hang up the phone.

Even if the broker follows those rules to the letter, you need to listen for signs that the deal is shady. Many a person has been taken in by smooth talkers hawking thinly traded, risky stocks, mostly issued by start-ups with little earnings. To avoid such scams, ask plenty of questions, including:

• How did you get my name?

• Who are your firm's principals and officers?

• Will you explain this investment idea to my attorney or accountant?

• How much of my investment would go to commissions? Can I see that in writing?

• When can we meet?

If someone dances around questions about his background and the investment, that's a serious red flag. Watch out for comebacks like, "Are you questioning my integrity or the legitimacy of this deal?" And be wary if the broker tells you:

• You can't meet with him face to face.

• You must make your decision immediately.

• The brokerage's address is a post office box.

• You're getting in on the ground floor.

• Your money will double quickly.

• There's no risk involved.

• The investment is IRA- or IRS-approved. (There's no such thing.)

Also ask for the broker's CRD number. This lets him know you'll check his credentials with the Central Registration Depository, a computerized data bank on registered brokers that's maintained by state securities regulators and the National Association of Securities Dealers. The CRD number ensures an accurate database search, although you can still get information without it.

Besides checking out the broker, it's important to investigate the investment itself. Request a prospectus, an annual report, or whatever other material the broker can supply, and consult independent sources as well. Then discuss the investment with an independent adviser. If you allow any broker to be your only source of information, you're asking for trouble.

—Staff Editor
Diane Weber


Diane Weber. If you get a cold call from a broker. Medical Economics May 23, 2003;80:40.