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Putting Your Broker to the Test
by Gene Walden

If you want something done right, get someone else to do it.
-- Marion Giacomoni

Are you getting the most out of your investment advisor? Most investors would have a hard time answering that because they have no easy basis by which to judge their broker's performance. But there are some factors you can look at to determine if you're getting the service and performance you deserve.

If your broker talks in circles, talks over your head about investment products he or she is trying to sell you, can`t explain, in terms you can understand how those products work and why those products are right for you, then you need a new broker. The broker`s job is to simplify your life, not complicate it. It`s a service they are handsomely paid to perform, and one of several benefits you should expect from your broker. If you don`t get them, get out.

Here`s when to fire your broker:

* Poor communications. You need a broker who can speak on your level, and give you a full and clear understanding of all the investments she recommends for your portfolio.

* Doesn`t solve operational problems. If mistakes were made on your statement, if charges were inadvertently added, or cash balances inadvertently deleted, if your dividend payments were late in coming, or your verification forms failed to arrive in the mail, you should expect your broker to solve those problems no questions asked. You don`t want a broker who lets problems fester, and fails to keep your account in order.

* Tries to sell you investments that don`t serve your interests. Some brokers are more interested in their own commissions than they are your investment returns. Sometimes brokerage firms have special products they push their brokers to sell. Often they are pre-packaged portfolios of stocks and bonds that come with a good sales pitch to get them out the door--and a fat commission to encourage the brokers to push them. Or the company may have a large position in a certain stock they want to unload, so managers offers brokers extra incentives to push those stocks. Watch out for those types of investments, and the brokers who try to sell them to you. You want a broker who recommends investments that fit your investment objectives--preferrably good quality stocks or stock mutual funds that you can buy and hold for the long term. If your broker seems to be more interested in his own returns than he is in yours, it may be time to take your business elsewhere.

* Lack of rapport. If you don`t feel comfortable dealing with your broker, if he or she has trouble answering your questions or helping you shape a solid investment portfolio, or if you simply don`t like your broker or don`t trust your broker, move on. You need a broker with whom you can have a compatible, trusting relationship.

* Poor performance. This, of course, is the bottom line. Even if your broker is the nicest person you`ve ever met, if she isn`t making you money, you need to look elsewhere. But be fair. Don`t expect every pick to go up--no broker can deliver 100 percent of the time. And don`t expect great returns in the middle of a bear market. That`s expecting the impossible. What you should expect is that your portfolio stays about even with the market--give or take a few percentage points. When the market is going up, most of your stocks should be going up with it, when the market`s going down, you should probably expect to see some of your stocks dropping in price. Riding the ups and downs of the market is part of the game. Over the long term you should do very well. But if the market keeps going up, and your portfolio doesn`t go up with it, your broker isn`t doing the job. Find someone else who will.

When your broker breaks the law
Never mistake motion for action.
           -- Ernest Hemingway

Just because there`s a lot of activity in your account doesn`t mean you`re making money. All it really means is that your broker is making money.

Churning, the practice of trading excessively in a client`s account to generate commissions, is the most common violation of the nation`s securities regulations. Churning occurs thousands of times a day, and most victims don`t even realize it`s happening. But if you discover that your broker is churning your account, it may be time not only to fire your broker but to report your experiences to the brokerage company`s compliance officer, or even to the Securities and Exchange Commission.

How is it possible that a broker can churn an account without the client realizing it. Here`s one way: The broker buys a stock for your account. A couple weeks later, when the broker realizes that he needs to generate some commission income to meet his company`s sales quota, he calls you to present one of three possible scenarios. Depending on how the stock has done, he might say, "That stock we bought a couple of weeks ago has gone up, so why don`t we sell out, take our profit, and move into another stock that looks more promising right now." Or, instead he might say, "That stock we bought two weeks ago has gone down, so let`s get out of it, and reinvest in another stock that looks more promising right now." Or, finally, he might say, "That stock we bought a couple of weeks ago hasn`t moved. Let`s sell it out and buy something else that looks more promising right now." So whatever the circumstances--whether the stock has gone up, stayed the same or gone down, the broker can rationalize a reason for you to sell out one stock and buy another--generating two commissions.

You don`t want a broker who is constantly urging you to turn over your portfolio. If it happens to you, tell your broker you want him to recommend good quality companies that you can hold for the long-term. If he continues to try to churn your account, report his practices to his company, and possibly to the SEC. Then move on to a different broker.

Here are four other common broker violations that you should be aware of. If at any time, you sense that you are falling victim to any of these practices, you should contact the broker`s company, and, depending on the violation, the SEC to resolve the problem before it costs you a big chunk of your life savings.

* Misrepresentation. A broker can not make false or misleading promises about an investment he or she is trying to sell you. For instance, if your broker claims that a stock or stock mutual fund is guaranteed to attain a specific rate of return, that is misrepresentation. Brokers can guarantee the return of some government bonds and insured certificates of deposit, but they can not guarantee the performance of a stock or mutual fund.

* Unsuitability. A broker who tries to put you into risky investments that are unsuitable for you is violating securities regulations. For instance, if you are retired, or nearing retirement, and your broker tries to sell you volatile penny stocks, options, futures, commodities or other highly speculative investments, he or she is not looking out for your best interests. The broker is attempting to take unnecessary risks with your retirement dollars, which could lead to financial ruin for you. Unsuitability is against the law, and violates the rules of the SEC. But unscrupulous brokers continue to push unsuitable investments on unwitting customers because of the high commissions they can earn selling those types of investments.

* Unauthorized trades. Unless you sign an agreement giving your broker discretionary control over your portfolio, the broker is not allowed to make any buys or sells in your account without your consent. If your broker is buying and selling investments for you without consulting with you first, the broker is violating SEC regulations.

* Misappropriation. If it happens to you, God help you. In a few scattered cases, investment managers have fled the country with their clients` money, or lost it all through bad investments--sometimes hiding the bad news from clients until all the money is gone. If the broker works for a major brokerage firm, it is very likely you would be able to recover most or all of your lost assets--but not without some sleepless nights and a lot of hassle. But if your broker works alone or for a small firm, your money could be gone forever. It has happened before, and it will happen again. That`s why the broker selection process is so important. You need a good broker a well-established, reputable brokerage firm. If you have concerns about the integrity of your broker or his firm, take your money while you can and move it elsewhere.

I know that you believe you understand what you think I said, but I am not sure you realize that what you heard is not what I meant.
            -- Berry & Homer, Inc.

A big part of your broker`s job is to give you information you can easily comprehend about your account, the trading activity in your account, and the objectives and risks of all of the investment options your broker recommends. You have a right to understand exactly what your money is invested in, and why.

The North American Sercurities Administrators Association recently issued its "Investor Bill of Rights" to help consumers steer clear of trouble. It states that you have the right to:

  • Ask for and receive information from a brokerage firm about the work history and background of your specific broker and the brokerage firm itself;
  •  Receive complete information regarding the risks, obligations and costs of any investment before you are asked to invest your money;
  • Receive recommendations appropriate for your financial needs and objectives;
  • Receive account statements that are easily understandable and accurate;
  • Withdraw your money in a timely manner and receive information about any restrictions on access to your money;
  • Discuss account problems with the branch manager or compliance department of the firm and receive prompt attention and fair consideration of your concerns;
  • Receive complete information about commissions, and other sales and service charges, maintenance fees, redemption fees and penalties;
  • Receive enough information from your broker to understand the terms and conditions of the transactions you make.

All good brokerage firms will adhere to these rights. If you believe your brokerage firm has breached those rights, you should transfer your business to another firm that is willing to respect your rights.

 Trust everybody, but cut the cards.
          -- Finley Peter Dunne

One way to insure that you don`t lose most of your assets to an unscrupulous broker is to spread your assets around. Many investors have more than one broker, or they have some of their investment money with a full service broker and some in mutual funds or a discount brokerage account they manage themselves.

You might use one broker who specialize in large national stocks and another who focuses on smaller regional companies.You`ll learn about all of their favorite picks, and you can decide for yourself which ones seem best for you.

Chances are you could do just fine even if you put everything in one account. But you might sleep a little better if you spread your money around -- and you might even enjoy slightly better returns.

Finding the Perfect Broker for You

No one ever said you had to go into the world of investing all alone. There is a burgeoning brokerage industry out there dedicated to making investing easier for you. For all the negative press about the brokerage business, the truth is most experienced brokers would do a fairly good job of helping you manage your money. But not all good brokers work well with all investors. Selecting the right investment advisor for you can be a very personal, very subjective process. A broker who may be perfect for one of your friends may be completely wrong for you, depending on your investment objectives, your threshold for risk, and your personality.

If you`re going to use a broker, be careful to find one who is ideally suited to your needs. Your broker becomes a vital element of your life, dictating to a great degree the direction and success of your financial well-being and, ultimately, your quality of life (particularly during your retirement years). That`s why you need a capable broker who keeps your best interests at heart.

With just a little extra effort you can find the perfect broker for you. Unfortunately, most investors do a poor job of selecting their broker. In fact, most investors have never met their broker face to face, have never visited their office, and wouldn`t recognize their broker if they passed him on the street. Here`s how the typical investor selects a broker:

He is sitting at home, watching TV, a drink in one hand, bag of potato chips in the other, when the phone rings. At the other end of the line comes the voice of a broker. "Good evening," he says. "I`m John Doe of ABC Investments. If I could come up with an investment opportunity for you with the potential to grow 30 to 40 percent over the next year, would you be interested?"

If the investor says yes, the broker thanks him, and hangs up. About two weeks later, the broker calls back and says, "Hello again. This is John Doe of ABC Investments. As you`ll recall, a couple of weeks ago when we talked, you said you would be interested in an investment with the potential to grow 30 to 40 percent. Well, you`ll be happy to know that I`ve found a great one for you." The broker explains the investment, and gets the investor`s order. Suddenly the investor is hooked, becoming the client of a broker he`s never met and knows absolutely nothing about.

That`s a very poor way to choose a broker. To do it right, you need to take a proactive approach. Here is good way to find the perfect broker for you:

Start by finding two or three broker prospects by getting referrals from friends, or by attending investment seminars sponsored by brokers. (Brokers often give free seminars to attract clients. Look in the local business press for listings.) When you attend the seminars, if you like the broker and agree with the message, set up an appointment with the broker at his or her office.

When you meet with your broker prospects, ask the following questions. (An easy way to remember the questions is to think of "TAPES"--as in "ticker-tape.")

  • Types of investors. What types of investors do you work with the most?
  • Approach. What is your investment approach?
  • Products. What types of investment products do you speciallize in?
  •  Experience. How long have you been a broker. (You probably don`t want the most experienced brokers in the firm because most of them already have hundreds or thousands of clients. But neither do you want a brand new broker who will make all of his or mistakes with your money. The ideal broker would probably be one with at least three years of experience. They`ve been around the block, they`ve made some mistakes with other people`s money -- so they have the experience -- and yet they`re still fresh enough in the business that they still have some enthusiasm for the job, and for you as a client.)
  • Service. Rather than to ask what type of service the broker will give you, you should set the agenda yourself, outlining the type of service you require. If you want the broker to call you once a week, for instance, or once a month, tell him and get him to agree to your terms in advance.

If the broker answers all the questions to your satisfaction, that`s a start. But you should also make sure that you have a good feeling for this person -- that you have a good rapport, that you trust him or her, and that you feel you could enjoy a pleasant, long-term working relationship with the broker.

You should also take one more step. Call the National Association of Securities Dealers hotline (800-289-9999). There you can find out if the broker has ever been the subject of disciplinary action, a civil judgment or a criminal conviction or indictment. Only then, once the broker has passed all the tests, should you sign on as a client. 

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