Finding a Securities Broker

It’s your money. Do you have reason to trust him/her and the company he/she works for?

1. What you should learn about a securities broker:

(a) What is his education?

(b) What professional licenses does he have? Is he a licensed “registered representative” whose activities are regulated by the SEC, the National Association of Securities Dealers, Inc. (“NASD”) and your state’s Blue Sky Commissioner?

(c) What is his experience in the business?

(d) How does he get paid? If it is sales commissions, he doesn’t get paid if he doesn’t make the sale. (Most brokers are paid by commission. This creates a conflict of interest as the broker gets paid on every transaction that he does for you, whether or not the transaction is in your best interest.)

(e) Financial Consultant, Financial Adviser, and the like have no legal meaning. (Almost everyone is a Vice President.)

(f) What is a Financial Planner, Certified Financial, or Chartered Financial Planner? (Certified Financial Planner and Chartered Financial Planner require additional tests of competency over and above the regular securities exams [Series 7 and maybe a Series 63] required to be a stockbroker.)

2. Who does he work for?

(a) Is his company a licensed securities broker regulated by the SEC, the NASD, and your state’s Blue Sky Commission? Is the company a member of a securities exchange such as the New York Stock Exchange? Do you care? (Most investors feel more comfortable buying investments from larger firms.)

3. Establish your investment objectives.

(a) Bear in mind there is a risk in every investment. The higher the potential return, the higher the risk. Things that sound too good to be true generally are.

(b) Do you want income, long term growth, liquidity? (Make sure your broker understands.)

(c) Are you willing to speculate? (Make sure your broker understands.)

4. Lean about the specific securities in which you invest. The key is: Do you understand what you are buying? (If you do not understand it – don’t buy it.)

(a) Does the security fit your goals? (Short term trading does not meet the goals of the long term investor.)

(b) What is the relationship between the broker and/or the company he works for and the company that issued the security you are investing in? (This may create a conflict of interest – watch out!)

(c) Is the security a bond, debenture, preferred stock, option, mutual fund or limited partnership? Is it a derivative or hybrid? (“Sophisticated” and “speculative” are dangerous words.)

(d) Is the investment registered with the SEC? Is it legally tradeable? How long after the purchase can you sell it? As a practical matter, will there be a real market for it? What market?

5. Look up your broker’s complaint history at the NASD site. (See Resource page links)