Advice From Your Securities Industry RegulatorsSelecting Your Broker
Before making a securities investment, you must decide which brokerage firm – also referred to as a broker/dealer – and sales representative – also referred to as a stockbroker, account executive, or registered representative – to use. Before making these decisions you should:
- Think through your financial objectives and prepare a personal financial profile.
- Talk with potential salespeople at several firms. If possible, meet them face to face at their offices. Ask each sales representative about his or her investment experience, professional background, and education.
- Find Out about the disciplinary history of any brokerage firm and sales representative by calling 1-800-289-9999, a toll-free hot line operated by the National Association of Securities Dealers, Inc. (NASD). The NASD will provide information on disciplinary actions taken by securities regulators and criminal authorities. Your state securities regulator also can tell you if a sales representative is licensed to do business in your state.
This is very important, because if you do business with an unlicensed securities broker or a firm that later goes out of business, there may be no way for you to recover your money—even if an arbitrator or court rules in your favor.
Understand how the sales representative is paid; ask for a copy of the firm's commission schedule. Firms generally pay sales staff based on the amount of money invested by a customer and the number of transactions done in a customer's account. More compensation may be paid to a sales representative for selling a firm's own investment products. Ask what "fees" or "charges" you will be required to pay when opening, maintaining, and closing an account.
Determine whether you need the services of a full service or a discount brokerage firm. A full service firm typically provides execution services, recommendations, investment advice, and research support. A discount broker generally provides execution services and does not make recommendations regarding which securities you should buy or sell. The charges you pay may differ depending upon what services are provided by the firm.
Ask if the brokerage firm is a member of the Securities Investor Protection Corporation (SIPC). SIPC provides limited customer protection if a brokerage firm becomes insolvent. Ask if the firm has other insurance that provides coverage beyond the SIPC limits. SIPC does not insure against losses attributable to a decline in the market value of your securities. For further information, contact SIPC at 805 Fifteenth Street, N.W., Suite 800, Washington, D.C. 20005-2207; or call (202) 371-8300.
Remember, part of making the right investment decision is finding the brokerage firm and the sales representative that best meet your personal financial needs. Do not rush. Do the necessary background investigation on both the firm and the sales representative. Resist salespeople who urge you to immediately open an account with them.