Brokers You Can Trust

Brokers You Can Trust

You’ve carefully considered your financial goals. You’ve talked with brokers at several investment firms. You’ve quizzed them about their investment experience and double-checked their professional and educational backgrounds. Now, you’re ready to pick the broker who will take your money and make it grow. Before you leap, though, remember that hundreds of brokers are either barred from doing business or suspected of cheating, stealing, forging paperwork, borrowing money against customers’ accounts and other assorted rules violations every year.

That’s the exception, of course, but before hiring a broker, you should consider these tips from the National Association of Securities Dealers (NASD). The adviser could spare your trouble later on.

Check on the broker’s disciplinary history: State security regulators can tell you if a broker is licensed to do business in your state. And the NASD operates a hotline that can also get you information on disciplinary actions taken against a broker by securities regulators and criminal authorities. The NASD often will not disclose information on pending lawsuits or complaints, however.

Ask for a copy of the brokerage firm’s commission schedule: This will tell you how the broker is paid. Firms usually pay sales staff based on the amount of money invested by a customer and the number of transactions done in a customer’s account. The broker may be paid more for selling the firm’s own investment products. Ask what fees or charges you will be required to pay when opening, maintaining or closing an account.

Decide whether you need a full-service firm or a discount brokerage firm: A full-service firm recommends stocks, fills orders, and offers research support. Discount brokerage firms take orders but do not offer recommendations. The charges you pay differ depending on the services provided.

Ask if the brokerage firm is a member of the Securities Investor Protection Corporation: The SIPC provides some customer protection if a member firm becomes insolvent. Also, ask if the firm has other insurance beyond the SIPC limits. For instance, the SIPC does not insure against losses attributable to a decline in the market value of your securities. For more information, call SIPC.

Do not rush into a decision: Investigate the firm and the broker thoroughly. Resist sales-people who urge you to open an account with them immediately. Never send money to buy an investment based simply on an effective telephone sales pitch. And never make a check out to a sales representative or send checks to an address different from the business address of the brokerage firm.

No jumping without reflection! Photo by Elena (Jamaica).

And What to Do If He Flunks

The SEC is the top securities regulator, but it has only about 50 inspectors to police the nation’s 20,000 brokers and investment advisors, so the settlement of disputes is largely to industry groups. The steps you can take:

Contact your broker for an explanation: If you are not satisfied, contact the broker’s management. Explain your position and ask if the matter can be resolved without resorting to law suits. If you get no satisfaction from the branch manager, file a complaint with SEC, NASD, or your local state securities regulator. These agencies can take disciplinary action against a broker but usually will not resolve a dispute or help you get your money back.

File for Arbitration: Arbitration has become the main route for settling disputes between investors and brokers because most investors sign an arbitration clause when they sign a customer agreement with a brokerage firm. You pay a small fee to have your claim reviewed and a decision made by an impartial arbitrator. You can file for arbitration with the NASD or the New York Stock Exchange, among other exchanges. The American Arbitration Association also provides securities arbitrators. If the amount in dispute is less than $10,000, your case will be assigned one public arbitrator. If the amount if over $10,000, two public arbitrators and one industry arbitrator will be used. It’s a quick and fairly inexpensive process – unless you choose to have a lawyer represent you. Recent figures show that investors who enter arbitration win their cases and recover some damages more than half the time. Once a decision is made, however, you have almost no recourse to appeal.

Go to court: If you did not sign an arbitration agreement, you can take your dispute to court. Though expensive and time-consuming, going to court offers the advantage of being judged by a jury of your peers, and you can appeal to a higher court if you lose the first round.

George Street, Toronto Downtown. Photo by Elena

How to Grade Your Broker

Is your broker doing a good job with your money? Give him a report card by asking yourself the following questions from the editors of Stand Up to Your Stockbroker (Consumers Union of U.S. Inc.)

Have your investments kept pace with market averages? – If the S&P 500 average has grown 15 percent over the past six months, have you done about as well? If not, investigate the situation.

Are you paying too much in commissions for what you are earning? – If you would have had an 18 percent return but your commission costs were 15 percent, you actually earned only 3 percent. If so, your broker may be recommending too many short-term trades.

Does your broker recommend you buy only proprietary products? – If so, find out why and ask if there are other products that are just as suitable. Overdependence on in-house products could mean the broker is more interested in winning in-house contests than in earning money for you.

Does your broker advise you only to buy and rarely to sell? – That may be fine if you own nothing but blue-chip securities. In any case, you should discuss this with your broker.

Has your broker tried to assume full control of all investment decisions without your permission? – If so, he is acting dishonestly, even if you have made money. Complain immediately.

If your broker difficult or impossible to reach when things are going badly? – A broker should be in touch with you in good times and bad. That doesn’t mean your broker should hold your hand through every transaction, but he or she should be available when you have to make tough decisions.