Choosing a safe and reliable broker is among the most critical steps in your career as a trader or investor. The issue is far from trivial as you will be trusting them with your money. There are several factors to consider when selecting a broker that will provide you with a secure and reliable trading platform but one criteria comes on top of all: regulation.
Here are the 3 basic tenets of picking a safe broker:
- Never ever trust an unregulated broker
- Choose a broker with top-tier regulation
- Your money is the safest when your broker is well regulated and you have investor protection
- Regulation is the absolute most critical aspect of a broker’s safety
- Never work with an unregulated broker
- Try to choose a broker that is overseen by a top-tier regulator
- Being member in an investor protection scheme adds an extra layer of security to a broker
- If you fall victim to a scam broker, recovering your money is nearly impossible
- If your broker is legit but it fails, you may be able to recover some or all your assets
Regulation above all
Checking whether a broker is regulated should be the first step in the broker selection process. Regulation means that the broker is overseen by a government agency or a regulatory body that ensures the service provider complies with relevant legal requirements and operates in a fair and transparent manner. Regulation is designed to protect investors and maintain the integrity of the financial markets.
Not all regulatory agencies are created equal. Some are more stringent and therefore brokers licensed and overseen by them are generally regarded as reliable.
|Name of regulator||Country of operation|
|SEC (Securities and Exchange Commission)||United States|
|FCA (Financial Conduct Authority)||United Kingdom|
|BaFin (Federal Financial Supervisory Authority)||Germany|
|ASIC (Australian Securities & Investments Commission)||Australia|
|FINMA (Swiss Financial Market Supervisory Authority)||Switzerland|
A broker licensed and regulated by any of the above is most likely not a scam and will have to adhere to strict rules, including keeping client funds separate from their own, maintaining adequate capital reserves, and ensuring that clients receive timely and accurate information about their investments.
A broker may be overseen by multiple regulators if it operates in several countries and the business entity you’ll be dealing with depends on your country of residence. For example, if you open an account with Capital.com as a Malaysian citizen you will be onboarded by a legal entity of the broker that is overseen by the regulator in Seychelles. Even though this is not a top-tier regulator, the fact that Capital.com is also regulated by the FCA and ASIC significantly raises the broker’s trust score.
Always make sure that the broker is regulated. If it has no regulatory oversight, do not open an account with them, no matter how enticing their offer.
Check out whether your broker is overseen by a top-tier regulator by using BrokerChooser's unique ScamShield tool designed to spot trusted and non-trusted brokers.
Investor protection fund
Some countries operate national investor protection schemes that are designed to offer an extra layer of security to retail traders and investors. These schemes are similar to deposit protection funds set up to guarantee bank deposits in case of a bank’s failure. But they protect securities and cash kept in brokerage accounts.
The US, the EU and the UK all have investor protection schemes in place for traders and investors.
|Country||Name of investor protection scheme||Protected amount per brokerage account|
$500,000 for securities of which $250,000 for cash
|EU||Different in every EU member country||Minimum €20,000 - may be more in certain countries|
National investor protection funds are typically set up by the government of the country in question and financial firms (i.e. brokers) are required to pay a certain amount of money into the fund. This can be either a set amount or a percentage of their revenue or operating profit. Think of this fund as a cash pool that can be tapped when a broker goes bust and its clients need to be compensated. Governments determine how much money needs to be in the fund, depending (among others) on the size of their financial market.
Some brokers have their own insurance policies in place (taken out from insurance companies) to provide an extra layer of protection to their clients. This insurance comes on top of any existing investor protection schemes and this boosts their safety score to a big extent.
Check out whether your broker is member in an investor protection scheme by using BrokerChooser's unique ScamShield tool designed to spot trusted and non-trusted brokers.
My money may not be safe with my broker, what should I do?
This is a valid question and the answer hinges on what type of problem you think you encountered with your broker.
Your broker is a scam
Despite regulatory efforts to root out fraudulent schemes in financial markets, scams are still an existing threat to traders. The bad news is that falling prey to scammers in most cases means your money is gone for good. You should file reports with your national regulator and the police, however, chances are slim that the perpetrators will be apprehended and the swindled funds recovered. Even if you get “lucky” and the scammers are identified/arrested, it may take years for claims to be settled, provided the stolen money is also seized.
Your broker goes bankrupt
Bankruptcies in the brokerage industry are not common but definitely happen. As a trader or investor you need to be aware of the risk of brokerage failure and be well informed of your options, should such a situation arise. Brokers are business entities and as such run the risk of hitting a wall (usually because of fraud or bad management). So what happens if your broker goes bust? The ensuing process is largely similar in all countries.
Once a brokerage company fails, a bankruptcy process will kick off and at some point the bankruptcy trustee will reach out to the clients of the broker, informing them how and by what deadline they should submit their claims. This is a crucial point in the process as far as investors are concerned: if you fail to submit your claim for cash and assets held with the bankrupt broker by the set deadline, your claim against the failed broker might not be enforceable.
Meanwhile the trustee will assess the bankrupt firm’s assets and liabilities to determine whether client funds are intact and have not been lost. If client funds are indeed available (i.e. the broker did not commit fraud, it simply ran into financial difficulties), your account (including your securities and cash) will be transferred to another broker and you will have access to them to do as you please. You will be notified about the transfer of your account.
If some (but not all) of client assets rare missing, the trustee will use the bankrupt firm’s remaining assets to compensate clients in proportion to the funds they had in their brokerage account. In this case, you may see some of your funds recovered, but definitely not all of them.
If there is an investor protection scheme in your country, you may get all your money back. For instance, if a US broker fails and you - as its client - had $400,000 in your brokerage account (in securities and cash) you will be fully compensated as the investor protection limit in the US is $500,000 (including $250,000 for cash). As a UK citizen, you will get your money back up to the £85,000 if your UK broker fails. Citizens of most EU countries are only covered up to €20,000 but certain EU member states have higher compensation limits.
In order to qualify for investor protection, however, your broker needs to be regulated in a country that runs an investor protection scheme and it must be a member of that scheme. If you are a German citizen but your broker is regulated in Australia, you will not qualify for German investor protection and there is no investor protection scheme in Australia to protect you.
Checkout how the process - which typically takes between 1 to 10 months - works on the flowchart below.
How to protect your money
While there are rules in place to shield investors from scammers and fraudsters in most countries of the world, there are steps you can take to protect yourself.
Choose a reputable broker
One of the best ways to protect yourself is to choose a reputable broker. Do your research and choose a broker that has a good reputation and a solid track record. Look for a broker that is regulated by a top-tier regulator and find out whether you are eligible for investor protection. Checking the website of the broker is a must. The quality of a broker’s website speaks volumes. Low overall quality, scant information should be treated as a red flag as these are typically signs of a scam broker.
Diversify your investments
Diversification is key to reducing your investment risk. By diversifying your investments, you spread your risk across different types of securities and industries. This can help protect your investments if one industry or security experiences a downturn.
Monitor your investments
It's important to monitor your investments regularly. Keep an eye on your account statements and check for any unauthorized transactions. If you notice any suspicious activity, contact your broker immediately.
Keep your contact information up to date
Make sure your broker has your current contact information, including your phone number and email address. This will ensure that you receive timely notifications about your account and any changes that may occur.
Check out BrokerChooser's ScamShield tool to see whether your broker is a trusted service provider and to what extent your assets in your brokerage account are covered by investor protection.
How can I tell if a broker is legitimate and not a scam?
You can and should do your own due diligence to determine if a broker is legitimate and not a scam. These are some of the most important steps you should take:
Make sure the broker is licensed and regulated. A legitimate broker should be licensed and regulated by a reputable financial regulatory authority, such as the Securities and Exchange Commission (SEC) in the United States or the Financial Conduct Authority (FCA) in the UK. You can usually find this information on the broker's website. Check their license number on the relevant regulatory authority’s website.
Check out the broker's reputation online by reading reviews and ratings from other traders. It’s wise to check whether the broker has been involved in any scandal or whether it has been fined for any kind of misconduct.
Verify the broker's contact information and check their customer service. Make sure the broker has a physical address and phone number. Contact the broker's customer service department and see how they respond. A legitimate broker should have a responsive and helpful customer service team.
Check the broker's fees and commissions. If they are uncharacteristically high, this may be a sign of scam.
If the broker advertises itself by guaranteeing high returns with no risk, do not trust them. All investments carry a certain amount of risk.
What should I look for when choosing a safe broker?
Here are some of the key factors to consider if you want to choose a safe broker:
Make sure the broker is licensed and regulated by a reputable financial regulatory authority, such as the SEC in the US or the FCA in the UK. Strict regulatory oversight ensures that the broker follows rules and regulations to protect investors.
Check the broker's reputation, read online reviews and ratings from other traders, as well as discussion forums. Make sure the broker hasn’t been involved in scandals and has not been fined by authorities for misconduct.
Look for a broker that offers a user-friendly trading platform equipped with a wide range of trading tools and features. The platform should provide fast execution and minimal downtime.
Contact the broker’s customer service to see whether they are easily available and provide relevant/fast answers.
Verify that the broker works with transparent and competitive pricing. It’s useful to compare their fees and commissions to other similar brokers.
Make sure the broker uses advanced security measures to protect your personal and financial information, such as SSL encryption and two-factor authentication.
How do I check if a broker is licensed and regulated?
The first step in checking whether a broker is licensed and regulated is to determine the regulatory authority that oversees the broker's operations. This will depend on the country where the broker is based, your country of residence and the financial products and services it offers. If a broker accepts clients from many different countries, it will have different legal entities for onboarding clients from various countries/regions. Find out which legal entity you’ll be dealing with and the regulator that oversees that particular entity.
As a next step, go to the broker’s website and look for regulatory/licensing information. This should include the name of the regulatory authority and the broker's registration number at the minimum. Most brokers will display this under a separate menu or at the bottom of the webpage.
You should verify the information with the relevant regulatory authority. Most regulatory authorities have online databases where you can search for registered brokers and investment firms. If you have any doubts about a broker's regulatory status, you can contact the relevant regulatory authority for clarification.
What are some common red flags of a fraudulent/scam broker?
These are some of the most common red flags of fraudulent/scam brokers:
- Lack of regulation and licensing - a broker that is not licensed and regulated by a reputable financial regulatory authority is a major red flag. This means that the broker may be operating outside the law and may be a scam.
- If a broker’s pricing policy is not transparent or available on its website, there is a good chance it may be a scam.
- Aggressive sales tactics: Do not work with brokers that use aggressive sales tactics to get you to deposit money or open an account. You should be extra cautious if you are contacted on social media or through an unsolicited phone call.
- Promises of very high returns with no risk - if a broker promises guaranteed profits or unrealistic returns on your investment, it's likely a scam. No legitimate broker can guarantee profits, as there is always risk involved in trading.
- Withdrawal issues are a very common occurrence among scam/fraudulent brokers. If a broker makes it difficult to withdraw your funds or delays withdrawals without a valid reason, it could be a scam.
How do I report a scam broker to the authorities?
If you fell victim to a scam broker and you were unable to solve the issue with your broker, you should report the case to the relevant authorities. Contact the relevant financial regulatory authority. You can find the contact information of the regulatory authority on their website. Provide all the details, such as the broker's name, contact information, and any evidence you have of fraudulent activities.
You should also report the case to the police if you believe the scam involves criminal activities. In an effort to retrieve your funds that you sent to the broker, ask your bank or payment provider for a chargeback. Even if you end up losing your funds to the scammers, by reporting the case to the authorities, you can help protect other investors.
What is the best way to research a broker's reputation?
There are several ways to check a broker’s reputation online. As a first step, verify that the broker is licensed and regulated by a reputable financial regulatory authority. You can check the regulator's website for a list of licensed brokers and any disciplinary actions taken against them.
Search for customer reviews and reliable review sites that analyze the broker and compare it to other similar brokerage firms. Look for brokers that have received awards or recognition from reputable organizations. These awards are often a sign of a broker's quality and reputation.
Research the broker's history, including its founding date, ownership, and any past legal or regulatory issues. This information can give you a better understanding of the broker's track record. Check the broker's website with special focus on clear and transparent information about fees, commissions, and trading practices.
Can I get my money back from a fraudulent broker?
While it is possible to recover money from a fraudulent/scam broker, in most cases the victims end up losing their money. Recovering your funds can be difficult and time-consuming, the whole process may often take years. Whether you’ll be able to get your money back depends on various factors such as the severity of the fraud, the jurisdiction where the broker is located, and the actions taken by you as a victim to recover your funds.
Can a broker manipulate MT4?
Technically, a broker can manipulate the MT4 platform to some extent. The most common ways to manipulate the platform include slippage (delaying or manipulating the execution of trades), spread manipulation (widening the spread during volatile market conditions), price manipulation (manipulating prices displayed on the platform), and stop-loss manipulation (intentionally triggering stop-loss orders).
Reputable brokers are unlikely to engage in such practices as they can face severe consequences, including loss of license, legal action, and damage to their reputation. Nevertheless, you should monitor your accounts and trades regularly and report any suspicious activity to the relevant authorities.