Choosing A Broker
What to Consider
While commission prices are a big factor for most investors in selecting a broker, they should not be your only criterion. Equally important are a firm's minimum-account-size requirements, the level of customer service that you can expect, and costs other than commissions (e.g. wrap fees and IRA custodial charges). You also need to be sure that you're dealing with a licensed, reputable investment professional. So if you're looking for a broker, here are some things to bear in mind.
- Are your needs best served by a discount or full-service broker? If you're an experienced investor who does his or her homework and invests actively (or with a short-term time horizon), you may be a good candidate for a discount broker. If, on the other hand, you need the assistance of a financial professional- for investment advice, recommendations, or portfolio consultations - you may be a candidate for a full-service broker. While full-service commissions are higher (often around $25 per trade) you will receive far more service than with the bare-bones online execution.
- How does a brokerage firm stack up based on non-commission considerations? For example, what does the firm charge for services such as maintaining an IRA or making wire transfers? What is the minimum initial deposit required by the firm? (The firm that advertises low-cost, or even no-cost, trades may require a high minimum balance that exceeds your investment nest egg.) Also, does the firm offer "extras" such as free quotes on their web sites, extensive market data, and detailed company reports (and do the reports cover companies whose stock you're interest in buying)?
- Is a given broker candidate licensed and is he/she registered with the Securities and Exchange Commission (SEC)? A quick query concerning a broker's credentials and disciplinary history can save a lot of future headaches and problems. The North American Securities Administrators Association (NASAA encourages all investors to call on their State or Industry regulators to check out a potential broker's record using the Central Registration Depository (CRD). The CRD is a database of the licensing and disciplinary histories on nearly 600,000 securities professionals and 5,600 securities firms. To make an inquiry about your broker, see the SEC web site at http://www.sec.gov/consumer/jchkout.htm.
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| The Bottom Line |
Choosing a broker is like hiring an employee. You must exercise the same care you would use in bringing someone into a business that you owned. Just as with a job candidate you need to interview different candidates, conduct background checks and ask for references. For tips on what to look for see this month's INVESTING coverage (center column).
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| Facts to use |
One phone call would have protected several investors who failed to make an inquiry about Martin Frankel, a Connecticut money manager who had been barred from the securities industry in late1992 for defrauding investors of more than $1 million through limited partnership interests. (See http://www.nasaa.org/
whoweare/media/
Frankel.html). The North American Securities Administrators Association even recommends that consumers check out their existing brokers and investment firms. "You're entrusting your financial future with this person, so you should know as much about them as possible," Bradley Skolnik, Indiana Securities Commissioner and President of NASAA.
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| Related Links |
Learn to detect and disconnect shady cold callers, pick up tips on how to protect your privacy on the Internet, report suspected incidents of fraud, and take a crash course on spotting consumer scams at http://www.fraud.org.
Locate your state securities regulators, find help for small businesses, peruse recent speeches and congressional testimony by securities regulators, and bone up on how not to get ripped off at http://www.nasaa.org.
Get background information on a broker/dealer, investigate the most recent disciplinary actions against brokers, take a look at the week's new crop of initial public offerings and learn how to take charge of your finances at http://www.nasd.com.
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