When buying a piece of fruit, you know to squeeze it, thump it, poke it and prod it as part of the inspection.
Hiring a broker isn't that instinctive or physical, but you need to take an approach that's just as thorough and methodical. You want to construct a reasonable list of factors to examine, particularly regarding the broker's background, work history and disciplinary record. You should also start off with a heavy dose of skepticism.
The following list should help you decide which broker to hire and which broker to report to the authorities.
You Make the Call
You probably don't want to hire a broker or a firm just because you are solicited by that individual or firm. "When you get cold-called, someone is hustling you to be a client," says Ralph Lambiase, director of the securities division for the
Connecticut Department of Banking
Cold-calling is perfectly legal. But if you're handing money to someone following a phone call or two, you obviously haven't done the necessary homework. You might be making a hasty decision. Remember:
are the one doing the hiring.
What Do You Want?
Before you even start talking to people and firms, you should know exactly what you want from a broker. If you're going to be doing all your own research and don't need any help, you only need execution. In that case, you'd be better off going with a discount brokerage that can give you cheaper commissions.
If you need someone to make recommendations and calm you when your stocks are getting crushed, you'll need a full-service broker. You will, however, pay more for that handholding.
The Interview Process
You'll want to talk to several brokers before hiring one. "You should consider interviewing several different professionals," says Bradley Skolnik, Indiana securities commissioner and president of the
North American Securities Administrators Association
, the organization of state securities regulators. "Most won't charge for a consultation."
Ask friends and acquaintances with investment goals similar to yours for recommendations. You should also ask each broker you interview for a list of references. Sure, you'll have to make a lot of phone calls, but it will give you a solid sense of how the broker interacts with clients.
You will want to know all the vitals about any potential broker. Where did the person go to school? How long has the broker been in the business? How many firms has the person worked for in the past? How long has the broker been working at his or her current firm?
If a broker has changed firms frequently, you'll want to know why. You also want to find out the names of the broker's previous employers. If the individual once worked at a well-known firm and now toils at an obscure brokerage, you should start asking questions.
"If the broker started at
and now works at Schlockmeister on the corner, that tells you something," says Mitchell Perlstein, an attorney with the
Investors' Law Center
in Boca Raton, Fla.
Name, Rank and Disciplinary Record
You need to check the backgrounds of a firm and a broker for any disciplinary problems or history of litigation.
The nation's securities regulators have this information at their fingertips and you can access it with relative ease.
To get the skinny on your broker, you can check the
Central Registration Depository
, a disciplinary and employment database available from
(It's called the CRD for short.) On the
NASDR Web site, you can find basic information about where a broker is licensed to do business and his or her employment history. This online database only had the bare-bones details. For information about any disciplinary actions taken by regulators for investment-related wrongdoing, you'll have to request that the information be sent to you.
You can also try calling your state securities regulator. The state regulator can give you the same information that's in the CRD and will probably be willing to answer questions for you. You can find the phone number of your regulator on the
NASAA Web site.
You can use these resources to double check the background information the broker gave you in person. If you find major inconsistencies, walk away.
When you inspect the disciplinary history of a very large brokerage firm, you should expect to see some less-than-flattering information, but that doesn't mean the firm isn't reputable. You should look for a pattern of sales-practice abuses or other violations.
It can be tough to decipher patterns at large global firms. "But when you see a lot of big fines to a small firm, you have to question what this firm is doing," says Morgan Bentley, an attorney representing both investors and brokers in Newark, N.J.
Ask About the Specialties
Ask any potential broker what types of products he or she specializes in. This will give you the best indication if your financial situation fits a broker's style. "Is the broker a tech guy or does he like muni bonds?" asks one longtime broker. If you're young and want high-octane tech stocks, you don't want a broker who is partial to steady but staid government bonds.
You want to know exactly what you are going to pay your broker in commissions. Period. With a discount or online broker, the commission schedule will probably be fairly simple and straightforward. With a full-service broker, the commission could vary more depending on the products and securities that you're buying.
You should still have a clear idea of what you'll wind up paying.
Sometimes, commissions might be based on the number of shares you trade. Other times, they could be based on the dollar value of the trade.
Ask a prospective broker whether you get a discount if you come in with your own idea. Yes, brokers can bargain like that.
"The bottom line is there's no reason why a broker can't tell you exactly how their commission schedule is going to work. If they refuse to do so, I would be very suspicious," says Perlstein. "I used to have a broker who told me I was getting 10% off -- 10% off what? I found out my father was paying the same without the favor."
Pushing Proprietary Products
You should know from the start whether a firm has its own products to sell. You might find a perfectly passable in-house mutual fund or two to buy, you might not. But in any case, be prepared for an aggressive sales push from the broker.
Even if the broker isn't getting paid more to sell the firm's funds or unit investment trusts, management still expects the broker to aggressively sell those investments and bring more assets into the firm.
You should know that ahead of time and be prepared to scream, "No!" over and over if you aren't interested.
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