By Ben Dell’Orto IAC Student Intern Fall 2018
If you find your broker or adviser asking if you want to pay with credit or debit, your answer should be “neither!”
According to the SEC, most firms that are registered with the SEC do not allow their clients to buy investments with credit cards. While this is a safe move on the firm’s part for many reasons, it is also helpful to investors, because it protects them from several potential issues.
Credit cards typically charge a higher interest rate than the return of many investments. So if your credit card charges 10% interest annual, an 7% return (not too bad) would leave the investor in a worse position than where he or she started, unable to pay off the interest with the returns. The SEC alert warns that on top of the annual interest, credit card companies charge transaction fees and late payment fees which add up quickly.
Use of a credit card can also prevent recovery from a firm in the event of fraud, because unauthorized charges must be reported to your credit card company quickly, or these disputes are waived.
The SEC alert notes the difference between a Margin Account and using a credit card. While Margin Accounts carry their own risk, these are standard, and with proper precautions, can be useful for investors in an appropriate position to take on the risk. Margin accounts allow investors to borrow money from the broker with which to invest, and that comes with a high risk.
Finally, unregistered firms carry their own risks, because the SEC cannot perform its typical role in protecting the investor from harm. An SEC registration provides investors with all kinds of information about a firm, and without that information it is impossible to make informed decisions. It is possible that these firms won’t have a BrokerCheck available either!
Suggestions of credit card payments, lack of a BrokerCheck, and an unregistered status with the SEC should all red flags for investors. Avoiding firms like these will protect your pockets.