The stock broker you choose should be a person whom you can trust and one that you have enough pertinent information about. Too many investors make the mistake of starting a professional relationship with a broker without knowing anything about the individual’s background. For instance, do you know how long your broker has been a broker? How about how the person handles money? How about their education and past work experience? If you are shaking your head no to these questions then you could be playing with financial fire. As an investor there are certain necessary pieces of information that you must know about your broker. Here we teach you what you need to know to protect yourself … and your money.
Investors who are well informed know what questions to ask to zero in on what a broker is all about. They also know the right questions to ask when it comes to communicating their needs as effectively as possible to the broker they have decided to work with. As well an investor who is “in the know” about brokers is less inclined to be charged higher commission fees then he/she should be. You need to do everything in your power to make sure that both your broker and the brokerage firm you select have your best interests at heart.
Research Your Broker
One of the first things you should do is to research your broker online. Search for him or his firm on the NASD website . Be specific about what you are looking for. You want to know whether there have ever been any judgments or liens against him. You want to see if any complaints have ever been lodged. If yes then when? What was the complaint about? You also want to see if he has ever been let go by a former employer. All of this information is pertinent to you. It is also free. You can request that a detailed report be sent to you. From there you can look it over more thoroughly.
Being privy to this information will help to provide a basis for your relationship with a brokerage firm and a particular broker. It will also help you to decide whether you can have confidence in the firm and the brokers its hires or whether you should look elsewhere.
Ask Questions, Get Answers
It then will become necessary to ask the prospective broker how long he has been working as a broker, how long he has been with the firm, and why he chose that firm. You will also want to know how many clients he works with on a regular basis. Asking questions and listening carefully to the answers can help you to learn plenty about the individual.
You also need to inquire about what the broker’s money line is. To put it another way, you need to find out how the broker makes his money. Once you know what the broker’s money line is you will know whether he has a sufficient number of clients. This will also provide insight into his terms of commission and/or changes made to commission charges.
Market Makers or Not?
You need to find out if the brokerage firm in question makes markets or whether it does not. The majority of brokerage firms are market makers. What this means is that they act as intermediaries between buyers and sellers when it comes to the trading of NASDAQ stocks. Many of these firms use the status they have as market makers to build an inventory of stocks. What this means is that they make a commission from their clients (like you) but they also make money off of the purchase and/or sale of the stock. The brokerage buys at the bid and sells at the offer (or ask). You on the other hand as an investor do the exact opposite.
This is something that many investors fail to ask brokers they are contemplating working with. This is a mistake. You need to ask. When you ask whether or not the brokerage firm makes markets in the stocks that you, the investor buy, this will give you a clearer picture of the amount of money that they are generating from your brokerage account. It can also provide you some leverage when it comes to negotiating the structure of the commission they receive from you.
Commissions are not written in stone. There is room for negotiation and then for further negotiation if need be. Bear in mind that there is a tremendous amount of information available online when it comes to discount brokers and stock research. For this reason the broker you select must remain as competitive as possible in terms of the commissions he charges his clients. This can work in your favor.
One thing you might suggest doing is to have the commissions you pay tied in with the performance of the broker. This can make the situation fair for both yourself and the broker. Most brokers that are worth your time and money will be willing to consider this idea of yours. Be aware of course that you get what you pay for. If you want the absolute best then you will pay more. For example, a full-service broker who has access to the top research and shares in an IPO will cost you more than if you go to a deep-discount brokerage firm. The key is to look around and shop around to find out what other brokerage firms are charging, regardless of the type of service(s) you are seeking.
Catch Up on Your Reading!
The more you know about a firm the better position you will be in to make the right decision about which one best suits your needs. You need to read up on the firm or firms you are considering. When it comes to researching the brokers with big names look to web resources as well as trade journals for the information you seek. While you do not want to be pessimistic or to assume the worst you need to look for any problems within the brokerage or any high-level departures. It also is a good idea to see if you can determine whether the company in question is competitive when it comes to the products they offer as well as the commissions they charge.
Underwriting and Research- Is it Done in House?
A conflict of interest can exist for firms that peddle their own research. This is particularly the case for the ones that recommend companies that they currently have a banking relationship with. This is something you should look out for as be informed about. If you are aware that such a conflict exists then you should let the broker know that you are aware of it. This makes it much less likely that you will be taken advantage of by the broker.
It is wise to let the broker know that you are benchmarking his performance against other major indexes. Examples of these include the S& P 500 and the Dow. If you are not familiar with the term “benchmarking” it refers to a standard by which something can be judged or measured. Benchmarking is commonly done in all different areas of business. It is defined as “the process of comparing one’s business processes and performance metrics to industry bests.”
You should also inform the broker that if he is not outpacing the Dow or the S & P 500 after a particular duration of time that you will purchase a no-load mutual fund that will be able to track those indexes for you. This is bound to get the broker’s full attention!
Review Your Statements
Do not become complacent about where your money is going. It is important for you to review every one of your monthly and quarterly statements. Make sure you can account for every dollar that you have invested. Focus in on every trade that you have made and confirm that the commission that was agreed upon is actually what was charged. If you find any discrepancies or any errors then speak with the broker without delay. Or you might want to instead make a call or pay a visit to the sales manager at the brokerage firm.
Communicate with the Sales Manager
Speaking of the sales manager, it would be a smart idea to speak to this individual periodically. Not all investors know that sales managers often receive an override on commissions that are made from the investors’ accounts. To explain it more clearly, this means that the sales manager earns money on trades that take place in your account when it comes to supervising the broker you work with as well as in terms of ensuring that the trades that are taking place are in line with your objectives for investing.
For these reasons it is wise for you to open the lines of communication with the sales manager of the brokerage firm. Develop a habit of speaking with this person as regularly and as consistently as possible. While the sales manager will not know every single solitary detail of your account as well as your broker does, he can still provide a wealth of information about the firm’s history as well as your broker’s history. The sales manager can also confirm any information that you are given from your broker. All of this can help you to feel better about the firm you have entrusted your financial and investing goals with.