Choosing an Investment Broker
This page provides basic information from state and federal securities industry regulators to help investors select a brokerage firm and sales representative and address an investment problem. It is intended to help you identify questions you should ask and warning signs to look for in order to avoid possible problems with you broker.
Selecting 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.
* 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 through NASD BrokerCheck either at www.nasdbrokercheck.com or by calling 1-800-289-9999. NASD BrokerCheck provides 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.
* 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 the level of service you need. Some brokerage firms provide recommendations, investment advice, and research support, while others may not. 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.
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Tips for Checking Out Brokers and Investment Advisers
Federal or state securities laws require brokers, investment advisers, and their firms to be licensed or registered, and to make important information public. But it's up to you to find that information and use it to protect your investment dollars. The good news is that this information is easy to get, and one phone call or web search may save you from sending your money to a con artist, a bad financial professional, or disreputable firm.
Before you invest or pay for any investment advice, make sure your brokers, investment advisers and investment adviser representatives have had run-ins with regulators or other investors. You also should check to see whether they are registered or licensed.
This is very important, because if you do business with an unregistered 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.
Brokers and Brokerage Firms
The Central Registration Depository (or CRD) is a computerized database that contains information about most brokers, their representatives, and the firms they work for. For instance, you can find out if brokers are properly licensed in your state and if they have had run-ins with regulators or received serious complaints from investors. You'll also find information about the brokers' educational backgrounds and where they've worked before their current jobs.
You can ask either your state securities regulator or NASD to provide you with information from the CRD. Your state securities regulator may provide more information from the CRD than NASD, especially when it comes to investor complaints, so you may want to check with them first. You'll find contact information for your state securities regulator on the website of the North American Securities Administrators Association. To contact NASD, call NASD's toll-free BrokerCheck hotline at (800) 289-9999.
Investment Advisers
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. Investment advisers who manage $25 million or more in client assets generally must register with the SEC. If they manage less than $25 million, they generally must register with the state securities agency in the state where they have their principal place of business.
Some investment advisers employ investment adviser representatives, the people who actually work with clients. In most cases, these people must be licensed or registered with your state securities regulator to do business with you. So be sure to check them out with your state securities regulator.
To find out about investment advisers and whether they are properly registered, 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 investment 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. You can also get copies of Form ADV for individual advisers and firms from the investment adviser, your state securities regulator, or the SEC, depending on the size of the adviser. You'll find contact information for your state securities regulator on the website of the North American Securities Administrators Association.
If the investment adviser is registered with the SEC, you can get Form ADV (Part 1 only) by sending an email to the SEC’s Office of Investor Education and Assistance. You also can make a request by sending a fax to (202) 777-1027. Please note that you will have to pay a photocopying charge of $0.24 per page, plus tax and postage. In addition, at the SEC’s headquarters, you can visit our Public Reference Room from 10:00 a.m. to 3:00 p.m. to obtain copies of SEC records and documents. If you have a question, you can contact OIEA at (202) 551-8090.
Because some investment advisers and their representatives are also brokers, you may want to check both the CRD and Form ADV.
Conclusion
Once you've checked out the registration and record of your financial professional or firm, there's more to do. For example, if you plan to do business with a brokerage firm, you should find out whether the brokerage firm and its clearing firm are members of the Securities Investor Protection Corporation (SIPC). SIPC provides limited customer protection if a brokerage firm becomes insolvent — although it does not insure against losses attributable to a decline in the market value of your securities. If you've placed your cash or securities in the hands of a non-SIPC member, you may not be eligible for SIPC coverage if the firm goes out of business.
Here are a few questions to get your started.
* What experience do you have, especially with people in my circumstances?
* Where did you go to school? What is your recent employment history?
* What licenses do you hold? Are you registered with the SEC, a state, or NASD?
* Are the firm, the clearing firm, and any other related companies that will do business with me members of SIPC?
* What products and services do you offer?
* Can you only recommend a limited number of products or services to me? If so, why?
* How are you paid for your services? What is your usual hourly rate, flat fee, or commission?
* Have you ever been disciplined by any government regulator for unethical or improper conduct or been sued by a client who was not happy with the work you did?
* For registered investment advisers, will you send me a copy of both parts of your Form ADV?