10 Questions to Ask Your Broker

Question #2: Do you receive extra commissions for selling house products?

For years, brokers were given free trips, expensive gifts and just extra money to sell "in-house" mutual funds to their clients.

And despite regulators' best efforts to crack down on this practice, it still continues. So, be sure to ask your broker to give you the performance history of the product he's pushing. Then go to TheStreet.com Ratings Mutual Fund Screener for an evaluation of the fund's risk-adjusted performance.

Question #3: Is your firm underwriting this issue?

Most firms, even the smaller regional ones, have some investment banking business. In other words, they help companies sell their stock to the public for a fee, through an initial public offering (IPO ), for example. There's nothing wrong with this since it's simply the manner in which companies raise capital .

The problem arises when brokers are asked to support the investment banking side of the business by hyping those same stocks to their customers, an obvious conflict of interest. The stocks are rarely worth the hype, and often get dumped on the public with disastrous results.

So, you need to find out if the firm is underwriting any of the stock offerings for the company it's recommending.

Question #4: Do your research analysts cover some of the same companies that the firm underwrites?

Brokerage firms are supposed to maintain a "Chinese Wall," which clearly separates their research departments from their underwriting departments. It is illegal for these departments to know what the other is doing before the information becomes public. However, in reality, the Chinese Wall is easily penetrated. It is not uncommon for research analysts to be forced to write a glowing report on a company that their brokerage firm is taking public, or to suppress a negative research report which the firm fears could hurt its underwriting business.

Furthermore, those same research analysts are under pressure to promote these companies to their retail brokers, who, in turn, are under pressure to sell them to their brokerage clients. Investment banking firms are required to perform what is called "due diligence" -- a serious and comprehensive review of a company -- before they decide to underwrite its stock. But they are also under tremendous pressure to bring in big underwriting fees. Consequently, sometimes their due diligence is not so diligent.