Brokers

Opening a Brokerage Account

Questions to Ask

Are you the type of person who will read as much as possible about potential investments and ask questions about them? If so, maybe you don’t need investment advice.

But if you’re busy with your job, your children, or other responsibilities, or feel you don’t know enough about investing on your own, then you may need professional investment advice.

Investment professionals offer a variety of services at a variety of prices. It pays to comparison shop.

You can get investment advice from most financial institutions that sell investments, including brokerages, banks, mutual funds, and insurance companies. You can also hire a broker, an investment adviser, an accountant, a financial planner, or other professional to help you make investment decisions.

Investment Advisers and Financial Planners

Some financial planners and investment advisers offer a complete financial plan, assessing every aspect of your financial life and developing a detailed strategy for meeting your financial goals. They may charge you a fee for the plan, a percentage of your assets that they manage, or receive commissions from the companies whose products you buy, or a combination of these. You should know exactly what services you are getting and how much they will cost.

People or firms that get paid to give advice about investing in securities generally must register with either the SEC or the state securities agency where they have their principal place of business. To find out about advisers and whether they are properly registered, you can read their registration forms, called the Form ADV. The Form ADV has two parts. Part 1 has information about the adviser’s business and whether they’ve had problems with regulators or clients. Part 2 outlines the adviser’s services, fees, and strategies. Before you hire an investment adviser, always ask for and carefully read both parts of the ADV. You can view an adviser’s most recent Form ADV online by visiting the Investment Adviser Public Disclosure (IAPD) website.

Remember, there is no such thing as a free lunch. Professional financial advisers do not perform their services as an act of charity. If they are working for you, they are getting paid for their efforts. Some of their fees are easier to see immediately than are others. But, in all cases, you should always feel free to ask questions about how and how much your adviser is being paid. And if the fee is quoted to you as a percentage, make sure that you understand what that translates to in dollars.

Brokers

Brokers make recommendations about specific investments like stocks, bonds, or mutual funds. While taking into account your overall financial goals, brokers generally do not give you a detailed financial plan. Brokers are generally paid commissions when you buy or sell securities through them. If they sell you mutual funds make sure to ask questions about what fees are included in the mutual fund purchase. Brokerages vary widely in the quantity and quality of the services they provide for customers. Some have large research staffs, large national operations, and are prepared to service almost any kind of financial transaction you may need. Others are small and may specialize in promoting investments in unproven and very risky companies. And there’s everything else in between.

A discount brokerage charges lower fees and commissions for its services than what you’d pay at a full-service brokerage. But generally you have to research and choose investments by yourself.

A full-service brokerage costs more, but the higher fees and commissions pay for a broker’s investment advice based on that firm’s research. The best way to choose an investment professional is to start by asking your friends and colleagues who they recommend. Try to get several recommendations, and then meet with potential advisers face-to-face. Make sure you get along. Make sure you understand each other. After all, it’s your money.

You’ll want to find out if a broker is properly licensed in your state and if they have had run-ins with regulators or received serious complaints from investors. You’ll also want to know about the brokers’ educational backgrounds and where they’ve worked before their current jobs. To get this information, you can ask either your state securities regulator or FINRA to provide you with information from the CRD, which is a computerized database that contains information about most brokers, their representatives, and the firms they work for. Your state securities regulator may provide more information from the CRD than FINRA, especially when it comes to investor complaints, so you may want to check with them first. You can find out how to get in touch with your state securities regulator through the North American Securities Administrators Association, Inc.’s website. You can go to FINRA’s website to get CRD information or call them toll-free at (800) 289-9999.

Opening a Brokerage Account

When you open a brokerage account, whether in person or online, you will typically be asked to sign a new account agreement. You should carefully review all the information in this agreement because it determines your legal rights regarding your account.

Do not sign the new account agreement unless you thoroughly understand it and agree with the terms and conditions it imposes on you. Do not rely on statements about your account that are not in this agreement. Ask for a copy of any account documentation prepared for you by your broker.

The broker should ask you about your investment goals and personal financial situation, including your income, net worth, investment experience, and how much risk you are willing to take on. Be honest. The broker relies on this information to determine which investments will best meet your investment goals and tolerance for risk. If a broker tries to sell you an investment before asking you these questions, that’s a very bad sign. It signals that the broker has a greater interest in earning a commission than recommending an investment to you that meets your needs. The new account agreement requires that you make three critical decisions:

1. Who will make the final decisions about what you buy and sell in your account?

You will have the final say on investment decisions unless you give “discretionary authority” to your broker. Discretionary authority allows your broker to invest your money without consulting you about the price, the type of security, the amount, and when to buy or sell. Do not give discretionary authority to your broker without seriously considering the risks involved in turning control over your money to another person.

Most investors maintain a “cash” account that requires payment in full for each security purchase. But if you open a “margin” account. you can buy securities by borrowing money from your broker for a portion of the purchase price.

Be aware of the risks involved with buying stocks on margin. Beginning investors generally should not get started with a margin account. Make sure you understand how a margin account works, and what happens in the worst case scenario before you agree to buy on margin.

Unlike other loans, like for a car or a home, that allow you to pay back a fixed amount every month, when you buy stocks on margin you can be faced with paying back the entire margin loan all at once if the price of the stock drops suddenly and dramatically. The firm has the authority to immediately sell any security in your account, without notice to you, to cover any shortfall resulting from a decline in the value of your securities. You may owe a substantial amount of money even after your securities are sold. The margin account agreement generally provides that the securities in your margin account may be lent out by the brokerage firm at any time without notice or compensation to you.

In a new account agreement, you must specify your overall investment objective in terms of risk. Categories of risk may have labels such as “income,” “growth,” or “aggressive growth.” Be certain that you fully understand the distinctions among these terms, and be certain that the risk level you choose accurately reflects your age, experience and investment goals. Be sure that the investment products recommended to you reflect the category of risk you have selected.

When opening a new account, the brokerage firm may ask you to sign a legally binding contract to use the arbitration process to settle any future dispute between you and the firm or your sales representative. Signing this agreement means that you give up the right to sue your sales representative and firm in court.

Ask Questions!

You can never ask a dumb question about your investments and the people who help you choose them, especially when it comes to how much you will be paying for any investment, both in upfront costs and ongoing management fees.

We encourage you to read our publication “Ask Questions” before talking to any investment professional. To get you started, here are some of the most important questions you should ask when choosing an investment professional or someone to help you:

• What training and experience do you have? How long have you been in business?
• What is your investment philosophy? Do you take a lot of risks or are you more concerned about the safety of my money?
• Describe your typical client. Can you provide me with references, the names of people who have invested with you for a long time?
• How do you get paid? By commission? Based on a percentage of assets you manage? Another method? Do you get paid more for selling your own firm’s products?
• How much will it cost me in total to do business with you?

Your investment professional should understand your investment goals, whether you’re saving to buy a home, paying for your children’s education, or enjoying a comfortable retirement.

Your investment professional should also understand your tolerance for risk. That is, how much money can you afford to lose if the value of one of your investments declines?

An investment professional has a duty to make sure that he or she only recommends investments that are suitable for you. That is, that the investment makes sense for you based on your other securities holdings, your financial situation, your means, and any other information that your investment professional thinks is important.

The best investment professional is one who fully understands your objectives and matches investment recommendations to your goals. You’ll want someone you can understand, because your investment professional should teach you about investing and the investment products.

How Should I Monitor My Investments?

Investing makes it possible for your money to work for you. In a sense, your money has become your employee, and that makes you the boss. You’ll want to keep a close watch on how your employee, your money, is doing.

Some people like to look at the stock quotations every day to see how their investments have done. That’s probably too often. You may get too caught up in the ups and downs of the “trading” value of your investment, and sell when its value goes down temporarily—even though the performance of the company is still stellar. Remember, you’re in for the long haul.

Some people prefer to see how they’re doing once a year. That’s probably not often enough. What’s best for you will most likely be somewhere in between, based on your goals and your investments.

But it’s not enough to simply check an investment’s performance. You should compare that performance against an index of similar investments over the same period of time to see if you are getting the proper returns for the amount of risk that you are assuming. You should also compare the fees and commissions that you’re paying to what other investment professionals charge.

While you should monitor performance regularly, you should pay close attention every time you send your money somewhere else to work.

Every time you buy or sell an investment you will receive a confirmation slip from your broker. Make sure each trade was completed according to your instructions. Make sure the buying or selling price was what your broker quoted. And make sure the commissions or fees are what your broker said they would be.

Watch out for unauthorized trades in your account. If you get a confirmation slip for a transaction that you didn’t approve beforehand, call your broker. It may have been a mistake. If your broker refuses to correct it, put your complaint in writing and send it to the firm’s compliance officer. Serious complaints should always be made in writing.

Remember, too, that if you rely on your investment professional for advice, he or she has an obligation to recommend investments that match your investment goals and tolerance for risk. Your investment professional should not be recommending trades simply to generate commissions. That’s called churning, and it’s illegal.

At this point, you are within two stops of completing your saving and investing journey! Now it’s time to move on to the next stop: How to Avoid Problems.

www.sec.gov/investor/pubs/roadmap/pick.htm