With the market still faltering, many investors want and need investment advice. The irony is that the brokerage industry's reputation has never been more tarnished.
From questionable analyst recommendations and rampant conflicts of interest to stories about former star brokers stealing millions from clients, you might feel the urge to just bury your money in the backyard.
But it is possible to find a reputable broker who suits your style and fits your needs. To start your search, you need to compile a list of factors to examine, including the broker's work history and disciplinary record.
The following checklist should help you find a solid broker who is not about to hop a plane to Panama with your money.
Decide What You Want
Before you start meeting with different brokers and firms, you have to decide what you want from a broker. If you do your own research and don't want any advice, you can use a discount brokerage firm, such as
, and save on commissions.
If you need advice, know exactly what kind. Do you want a broker to pick stocks? Are you more interested in bonds? Or do you want someone who can do both and give asset allocation advice?
Once you know the type of broker you want, interview several candidates. To put together a list, ask for recommendations from friends, family members and acquaintances who have similar investment goals. Then set up meetings with a number of professionals.
A Good Grilling
When you first meet with a broker, brace yourself to ask some tough questions. "Interviewing a broker is no different than interviewing the guy who is going to fix the roof on your house," says Ralph Lambiase, the director of the securities division for the Connecticut Department of Banking.
First, get all the essential statistics. Where did the broker go to school? How long has this person been in the business? How many firms has the broker worked for and what are their names? How long has the broker been working at his or her current firm? If this professional has changed jobs frequently, then you'll want to ask why.
A Discipline Problem?
You can then check the broker's answers against what's on record at the nation's securities regulators. You should inspect the firm's record as well. You're looking for any disciplinary problems or a record of litigation.
To uncover any dirt on a broker or a firm, check the Central Registration Depository (called the CRD), an employment and disciplinary database available from NASD Regulation. Just visit the
NASDR Web site.
Here, you can uncover basic information about a broker's work history and where that person is licensed to do business. For details about any disciplinary actions taken by regulators, you'll have to request that the information be sent to you. (The heading "Disclosure Events" is where you'll find a broker's disciplinary history.)
You should also contact your state securities regulator. You can find the appropriate regulator at the
Web site run by the North American Securities Administrators Association, the organization of state securities regulators. You might even be able to get people on the phone to answer your questions.
Of course, pay attention to any disciplinary problems a broker has had. Unauthorized trading or other sales-practice violations are red flags. But you might expect to see one or two dings on the record of someone who has been in the business for a long time. "Is it only one infraction for someone who has been in business for 15 years?" asks Lambiase. "Or has it been six violations in five years? If that's the case, say goodbye and have a nice day."
You should also examine the firm's record. With a large, global brokerage house, you'll have a hard time identifying any pattern of abuses. But if you find a small firm with a lot of big fines, you should run in the other direction.
Even if you don't find any evidence of wrongdoing, these resources allow you to double-check the background information the broker gave you. If you uncover inconsistencies in important areas, move on to the next candidate.
That exercise will hopefully dig up any dirt from a broker's past. But you'll also want to determine if the broker's philosophy jibes with your own. You should go into a meeting with a prospective broker knowing your investment objectives (income or capital preservation, for example), and ask the broker how he or she will achieve those goals. Let the person give you ideas and outline some appropriate investments. If the broker laughs and says no, leave immediately.
With the market's dramatic collapse over the past few years, you probably want a broker who knows both stocks and bonds. Ask yourself: Can this broker build a diversified portfolio?
If you're worried a broker will just throw you into stocks the firm is recommending -- a practice that turned out to be disastrous during the dot-com collapse -- ask the broker where he gets his ideas. You can also ask the broker what he has been buying for clients lately. If the stocks are all obvious winners and look expensive, that doesn't say much. But if the broker offers some less-than-obvious names and can explain how he found them, that professional has probably been doing his own work.
You should also quiz the broker on how he gets paid. Where the money comes from could uncover any biases. The broker should be able to tell you how the firm's commission structure works and how much you might wind up paying for his services. If you don't get a clear answer, don't be afraid to walk away.
The broker should also be willing to tell you how much money he oversees. If the he's any good, that professional should have a fat book of business and be managing more than, say, a few thousand dollars. "Ultimately you want somebody who has $30 million, $40 million or $50 million under management," says one longtime broker.
Also ask for a list of existing clients to call as references. If a broker balks or refuses that reasonable request, you should leave.
And naturally you want to find someone whose personality clicks with your own. If you're annoyed, the broker's investment advice might be useless, because you'll have a hard time getting past pure irritation.