From Your Perspective: Choosing a broker Choosing a brokerChoosing a broker is a big step, whether you’re a new investor who wants to open your first account or a more experienced investor who wants to establish a new professional relationship. As you consider your alternatives, you’ll be focusing on two main goals: Identifying a brokerage firm that offers the services you want and finding an individual broker with whom you’re comfortable working. Brokerage firms, also known as broker-dealers, come in three sizes: National firms with branch offices across the country Regional firms with branch offices in a number of states within one area of the country Local firms, which may have a single office or a number of branches within a city, a group of counties, or a state All brokerage firm branches handle basic securities transactions, including buying and selling stocks and bonds on your behalf. Most offer individual retirement accounts (IRAs), college savings plans, mutual funds, and annuities. Some firms also execute orders for other investment products, such as options contracts, or serve as introducing brokers if you wish to trade futures contracts. A word to the wise If you want to buy and sell securities, you generally must handle those transactions through a licensed broker-dealer. There are a few exceptions, such as reinvesting stock dividends through a company-sponsored reinvestment program or buying your employer’s stock through an employee stock purchase plan. But the vast majority of transactions involve a broker. Page 1 of 8 Finding the right brokerThe simplest way to start your search for a broker is by asking people you know if they’re working with someone whose services they’d recommend. You can ask friends, family, colleagues, or perhaps your employer for recommendations. If you’re working with other professionals, such as an attorney or an accountant, they’re also good potential sources for referrals. Alternately, you could check whether brokerage firms in your community are offering seminars, classes, professional meetings, or community events on personal finance or investing. If you attend, and especially if you schedule a follow-up meeting, you’ll be able to form an impression of what it would be like to be a client of the firm. You’re likely to discover that your final choice will be based on a combination of substance — with regard to credentials — and a personal style with which you’re comfortable. Questions to ask Here are some questions you can ask yourself as you narrow your search: Do you want to select investments collaboratively or do you expect your broker to take responsibility for making recommendations? Are you investing to meet specific financial goals or are you interested in building a broad-based portfolio? Do you want to invest with a firm that will also provide banking, investment planning, wealth management, and other services, or do you prefer to keep various parts of your financial life separate? Do you want access to online research and tools provided by the firm you work with? Do you want to be able to meet with your broker on a regular basis? Do you have enough? Some firms require minimum opening balances for brokerage accounts, and others link the services available to you to the size of your investable assets. That’s something you may have to take into consideration in making your choice. Page 2 of 8 How brokers are paidThe way you pay your broker depends on the type of account you have and the type of investments you make. You can ask for summary of the charges that might apply. For example, in transaction-based accounts, you pay a commission or sales charge when you buy or sell. In an asset-based account, you pay an annual fee based on the value of your account. Paying commissions If you pay commissions, you generally are charged a percentage of the purchase or sale price for each transaction. The rate can vary significantly from one firm to another, and even within a firm. If you trade frequently, for example, you could pay at a lower rate than a client who buys and sells only once or twice a year. In some cases, firms may charge a flat rate for a trade up to 1,000 shares of stock or comparable quantities of other products. If the rate is low, you could end up paying very little for your transactions. That’s often the case if you trade frequently. But the opposite may be true as well, especially if the fee is high and you are managing your portfolio by selling off holdings with little market value. You may also find that commission-based firms charge lower rates for orders you give online than they do for phone orders or other broker-assisted trades. The price you pay could also depend upon the kind of account you open and the kinds of orders you place. Some products have different commission structures, too. Asset-based fees In contrast, some firms charge an annual asset-based fee for their services. In that case, the fee may cover the cost of all of your transactions or you may pay a substantially reduced commission on trades over a predetermined number. That structure may make fee-based accounts best suited to investors who trade frequently and whose commission payments might exceed the annual fee. Conversely, a fee-based approach could be more costly for a buy-and-hold investor with a sizeable portfolio. Fee-based brokers often provide a greater level of investment advice and planning than commission-based brokers do — though that’s not a hard-and-fast rule. You’ll want to include that possibility when you weigh which approach seems to make the most sense for you. You may find that if you are more comfortable paying one way rather than the other that your choice of firms is dictated by that decision. A word to the wise Commissions on trades aren’t the only costs associated with brokerage accounts. Some firms charge an annual maintenance fee, and some charge a fee if the value of your account dips below a certain level. If you have an IRA, there may be a custodial fee, though it may be waived if your account balance reaches a certain level. Transfer fees may apply if you want to move your account to another firm. It’s a good idea to review the information each firm provides on its fee structure when considering your choices. Page 3 of 8 Broker background checksOnce you’re ready to consider particular brokers and brokerage firms, there are two questions you should ask: Is the broker licensed? Is the firm registered with the Securities Investor Protection Corporation (SIPC)? Broker licensing By doing business with a licensed broker, you’re protected by a web of regulations and standards that are enforced by state, federal, and industry regulators. For a person to work as a licensed broker, also known as a registered representative, he or she needs to undergo a professional background check and pass a detailed securities exam administered by the Financial Industry Regulatory Authority (FINRA). Once brokers are licensed, they’re required to meet stringent requirements, including continuing education and disclosing important information, such as their disciplinary history. SIPC You’re not insured against market risk — the chance that your investments will drop in price — but if your brokerage firm is a member of SIPC, you are protected if the firm goes out of business. SIPC works to return securities and cash to eligible investors whose brokerage firms are in financial trouble. So if the firm goes under, you don’t have to follow. A word to the wise You can request reports on specific brokers and brokerage firms for free at www.broker check.finra.org or from your state securities office. The information comes from the Central Registration Depository, a public database. Look for the words “Member Securities Investor Protection Corporation” or “Member SIPC” on ads and signs for a brokerage firm. You can also look up a firm in the SIPC member database at www.sipc.org. Page 4 of 8 Meet the brokerWorking with an individual broker is a more involved but potentially more rewarding experience than simply signing up for an account that processes trades electronically. An experienced broker can offer guidance and information, and may help you articulate your financial plan and investing strategies. But you need to know whether you’ll be able to work well with that individual or if you’re better off with someone else. One of the best ways to find out is to screen your choices first by phone, and then by one-on-one interviews. A phone call To narrow the field, you can begin by calling each of the brokers you’re considering, explaining what kind of investing you want to do, and the qualifications you’re looking for. If you like what you hear, you can set up a personal meeting to follow up. It’s good to set a few minimum requirements, such as these: Experience. Five years is a sensible minimum. You should also ask if the broker has worked with investors similar to you and has handled the kinds of investments you’re interested in. Reputation. A good reputation is important. You can ask for references, but be aware that privacy laws require that brokers get permission before releasing the names of their clients to you. Helpful hints If the broker has a website or has published articles or books, you might read them to find out whether his or her ideas about investing appeal to you. Page 5 of 8 Interviewing a brokerAn interview can make or break any business relationship, especially one that depends on the interaction between professional and client. It helps to know what you want to find out before the interview begins, so you may want to prepare a list of questions. Taking notes will also give you a clearer sense, afterwards, of what was said and help you compare your choices later on. Make a list of questions Here are some basic questions you might want to ask: What experience do you have, and what is your professional background? What types of investments do you sell the most? Who are your typical clients, and what kinds of investments do most of them make? What are your ideas about how someone like me should be investing? How will you help me invest for my retirement (or other goals)? How often will you review my portfolio? How will you keep me up to date on my investments? What continuing services will I get, and how much can I expect to pay each year? How are you paid? How are your fees calculated? Do you have any clients who would agree to be references? Page 6 of 8 Comparing broker candidatesTo keep track of your interviews, it’s a good idea to prepare a summary of your impressions and keep it with your notes, especially if you’re talking with a number of brokers over several weeks. You may find that the choice is obvious, even before you’ve finished your search. Or you may have to draw up a balance sheet to choose between candidates. If it’s that close, you may find that it helps to review the services and fees of each broker’s firm. Here are some questions you might want to ask yourself as part of the decision process: Did the person: Treat you with courtesy and respect? Listen carefully to your questions and answer them candidly? Did the person find out about you by: Asking what your financial goals are? Asking about your income and assets? Discussing your tolerance for risk? Checking references Clients who agree to be references for their brokers are generally those who are satisfied with the service they receive. But you may be able to find out useful information if you ask to talk to clients with similar financial experience, circumstances, or goals to your own. You should also ask to talk to both recent and long-term clients. Be aware, however, that brokers aren’t legally required to provide references. Warning signs You should expect the brokers you interview to be professional and honest, especially if you’ve been referred to them by people you trust and they have the appropriate credentials. Nevertheless, be wary of any broker who: Guarantees you’re going to make a lot of money Insists that an uninsured investment has little or no risk Advises you to put all of your money in one investment Recommends investments you don’t recognize, and doesn’t try to explain them clearly, or says they’re too complicated to understand Argues with you or ignores your instructions Is vague about the commission or fees he or she will earn Asks you to sign any documents you haven’t fully read or don’t fully understand Page 7 of 8 Using a brokerage accountOpening a brokerage account is a big first step toward your investment goals. But if the energy you’ve spent in finding the right firm and the right broker is going to pay off, it’s important for you to commit to making the most of the arrangement. That means: Staying active and paying attention Reading the material your broker gives you or recommends that you read Asking for information or clarification if you need it Reviewing your plans and your progress Following through on investment decisions Once you’ve done the work to pick a broker, your work as an investor has just begun. Getting started You should read the account opening forms carefully before you sign. If you don’t understand something — the costs, the restrictions, the services you’re entitled to — ask questions before you commit. Once you do sign, keep copies for yourself and set a habit of careful recordkeeping, tracking all the materials, documents, and conversations you have with your broker. The records you keep will help you stay on track and serve as a benchmark for evaluating your returns. And they’ll be a handy reference if you need to correct an error or resolve a dispute. Try an experiment To get a feel for working with an individual broker, you can start with a specific goal, such as investing for a child’s education or your own retirement. If you’re satisfied with the advice you’re given, you can start working together on your larger investment strategy. Page 8 of 8