Mutual Fund Fraud Overview
Mutual funds are investments where fund managers accepts funding from a client and searches around for smart investments on their behalf. Mutual funds can be quite lucrative if the broker is legitimate and if the investments go well. However, if the broker is a fraud or not legitimate, than he/she may be looking to commit mutual fund fraud. There are a variety of ways that mutual fund fraud can be perpetrated. Below are just a couple of ways that mutual fund fraud can be committed.
One way involves a process known as "churning". Churning investments is when a stockbroker influences the investor to switch companies to invest in, even though a good investment could have been made at the company they were previously with. Stockbrokers may do this as a means to collect more on commission, and may continue to ask their client to keep switching companies in order to keep collecting more and more commissions.
"Break point fraud" is another form of mutual fund fraud that is perpetrated by the broker. Break point fraud occurs when a stockbroker encourages his/her client to invest in a bunch of smaller funds so they may collect more on the on commission, when it would actually be more cost effective for the investor to invest his/her funds into fewer investments but for a larger amount. For example, it would be more cost effective for a client to invest in one share worth $56,000.00 if they only have to pay 4% on the commission, where as it would be more expensive for the client to invest in two investments of $28,000.00 at 5% each.
The cutoff amounts effecting the percentage of commission is what is know as the "break points". Knowing that the broker will receive more in commission by ill advising their client to go with the latter option, if the broker chooses the latter than this would be an example of investor fraud.
It is also important to research mutual fund companies to ensure that they are legitimate in order to avoid investor fraud. Another way to avoid falling victim to investor fraud is to make sure the client the prospectus regarding their potential broker. The prospectus is basically equivalent to a background check, that shows their track record as an broker. It is also important to compare markets and to look at all hidden costs including load funds versus commission percentages in order to combat investor fraud.
