Selecting Your Broker or Investment Advisor
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. State
securities regulators 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 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
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
Making An Investment
The New Account Agreement
Generally, a brokerage firm will require a
customer to sign a new account agreement. You should carefully review the
information contained in this document because it may affect your legal rights
regarding your account.
Ask to see any account documentation prepared
for you by the sales representative. Do not sign the new
account agreement unless you thoroughly understand it and agree with the terms
and conditions it imposes on you. Do not rely on verbal
representations from a sales representative that are not contained in this
The sales representative will ask for
information about your investment objectives and personal financial situation,
including your income, net worth, and investment experience. Be honest. The
sales representative will rely on this information to make appropriate
investment recommendations for you.
Completion of the new account agreement
requires that you make three critical decisions:
- Who will control decision-making in
your account? You will control the investment decisions made in
your account unless you decide to give discretionary authority to your sales
representative to make investment decisions for you. Discretionary
authority allows a sales representative to make investment decisions
based on what the sales representative believes to be best - without
consulting you about the price, the type of security, the amount and
when to buy or sell. Do not give discretionary authority to your sales
representative without seriously considering whether this arrangement is
appropriate for you.
- How will you pay for your
investment? Most investors maintain a cash account that requires
payment in full for each a security purchase. An alternative type of account
is a margin account. Buying securities through a margin account
means that you can borrow money from the brokerage firm to buy securities
and requires that you pay interest on that loan. You will be required to
sign a margin agreement disclosing interest terms. If you purchase
securities on margin (by borrowing money from the brokerage firm), the
firm has authority to immediately sell any security in your account, without
notice to you, to cover any shortfall resulting from a decline in the value
of your securities. If the value of your account is less than the
amount of the outstanding loan - even due to a one day market drop - you
are liable for the balance. This may be a substantial amount of money
even after your securities are sold. The margin account agreement generally
provides that the securities in your margin account may be lent out by the
brokerage firm at any time without notice or compensation to you.
- How much risk should you assume?
In a new account agreement, you must specify your overall investment
objective in terms of risk. Categories of risk may have labels such as
"income," "growth," or "aggressive growth." Be
careful you understand the distinctions between these terms, and be certain
that the risk level you choose accurately reflects your investment goals. Be
sure that the investment products recommended to you reflect the category of
risk you have selected.
When opening a new account, the brokerage firm
may ask you to sign a legally binding contract to arbitrate any future
dispute between you and the firm or your sales representative. This may be part
of another document, such as a margin agreement. The federal securities laws do
not require that you sign such an agreement. You may choose later to arbitrate a
dispute for damages even if you do not sign the agreement. Signing such an
agreement means that you give up the right to sue your sales representative and
firm in court.
You may have your securities registered either
in your name or in the name of your brokerage firm. Ask your sales
representative about the relative advantages and disadvantages of each
arrangement. If you plan to trade securities regularly, you may prefer to have
the securities registered in the name of your brokerage firm to facilitate
clearance, settlement, and dividend payment.
The Investment Decision
Never invest in a product that
you don't fully understand. Consult information sources such as business and
financial publications. Information regarding the fundamentals of investing and
basic financial terminology can be found at your local library.
Ask your sales representative for the
prospectus, offering circular, or most recent annual report - and the
"Options Disclosure Document" if you are investing in options. Read
them. If you have questions, talk with your sales representative before
You also may want to check with another
brokerage firm, an accountant, or a trusted business adviser to get a second
opinion about a particular investment you are considering.
Keep good records of all information you
receive, copies of forms you sign, and conversations you have with your sales
Nobody invests to lose money. However, investments
always entail some degree of risk. Be aware that:
- The higher the expected rate of return, the
greater the risk; depending on market developments, you could lose some or
all of your initial investment, or a greater amount.
- Some investments cannot easily be sold or
converted to cash. Check to see if there is any penalty or charge if you
must sell an investment quickly or before its maturity date.
- Investments in securities issued by a
company with little or no operating history or published information may
involve greater risk.
- Securities investments, including mutual
funds, are NOT federally insured against a loss in market value.
- Securities you own may be subject to tender
offers, mergers, reorganizations, or third party actions that can affect the
value of your ownership interest. Pay careful attention to public
announcements and information sent to you about such transactions. They
involve complex investment decisions. Be sure you fully understand the terms
of any offer to exchange or sell your shares before you act. In some cases,
such as partial or two-tier tender offers, failure to act can have
detrimental effects on your investment.
- The past success of a particular investment
is no guarantee of future performance.
A high pressure sales pitch can mean trouble.
Be suspicious of anyone who tells you, "Invest quickly or you will miss out
on a once in a lifetime opportunity."
If your sales representative asks you to do any of
these things, contact the branch manager or compliance officer of the brokerage
- NEVER send money to
purchase an investment based simply on a telephone sales pitch.
- NEVER make a check out to a
- NEVER send checks to an
address different from the business address of the brokerage firm or a
designated address listed in the prospectus.
Never allow your transaction
confirmations and account statements to be delivered or mailed to your sales
representative as a substitute for receiving them yourself. These documents are
your official record of the date, time, amount, and price of each security
purchased or sold. Verify that the information in these
statements is correct.
Certain activities may indicate problems in the
handling of your account and, possibly, violations of state and federal
BE ALERT FOR:
- Recommendations from a sales representative
based on "inside" or "confidential information," an
"upcoming favorable research report," a "prospective merger
or acquisition," or the announcement of a "dynamic new
- Representations of spectacular profit, such
as, "Your money will double in six months." Remember, if it sounds
too good to be true, it probably is!
- "Guarantees" that you will not
lose money on a particular securities transaction, or agreements by a sales
representative to share in any losses in your account.
- An excessive number of transactions in your
account. Such activity generates additional commissions for your sales
representative, but may provide no better investment opportunities for you.
- A recommendation from your sales
representative that you make a dramatic change in your investment strategy,
such as moving from low risk investments to speculative securities, or
concentrating your investments exclusively in a single product.
- Switching your investment in a mutual fund
to a different fund with the same or similar investment objectives. Unless
there is a legitimate investment purpose, a switch recommended by your sales
representative may simply be an attempt to generate additional commissions
for the sales representative.
- Pressure to trade the account in a manner
that is inconsistent with your investment goals and the risk you want or can
afford to take.
- Assurances from your sales representative
that an error in your account is due solely to computer or clerical error.
Insist that the branch manager or compliance officer promptly send you a
written explanation. Verify that the problem has been corrected on your next
If you have a problem
If you have a problem with your sales
representative or your account, promptly talk to the sales representative's
manager or the firm's compliance officer. Confirm your complaint to the firm in
writing. Keep written records of all conversations. Ask for written
If the problem is not resolved to your
satisfaction, contact the appropriate regulators listed at the end of this
document. Investor complaint information assists these regulators in identifying
violations of the securities laws and prosecuting violators. However, none of
these organizations is authorized to provide legal representation to individual
investors or to get your money back for you.
Obtain information on using arbitration to
resolve your dispute by contacting the NASD, New York Stock Exchange, American
Stock Exchange, Municipal Securities Rulemaking Board, Boston Stock Exchange,
Chicago Board Options Exchange, Chicago Stock Exchange, Pacific Stock Exchange,
or Philadelphia Stock Exchange. Each of these organizations operates a forum to
resolve disputes between brokerage firms and their customers. It may be
desirable to consult an attorney knowledgeable about securities laws. Your local
bar association can assist you in locating a securities attorney.
Securities Regulators To Contact
U.S. Securities and Exchange Commission
450 5th Street, NW
Washington, DC 20549
Office of Investor Education and Assistance
The SEC has eleven regional and district
offices across the country. Check our on-line
directory to find out which SEC office is closest to you.
North American Securities Administrators
10 G Street, NE
Washington, DC 20002