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Summary

There are two types of investment advisors: a financial planner and a person known as a Stockbroker, Financial Advisor or Investment Advisor (we'll refer to this person as a Stock Broker). In general:

  • Stockbrokers buy and sell stocks bonds, mutual funds and other securities on your behalf. They also provide investment advice in one form or another and other services.
  • Financial planners survey and provide advice about your entire financial picture including investments, taxes and debt management. To learn more about financial planners, see: Financial Planners

If you decide to engage a stockbroker, the first question is what type you should use: a Discount Broker, a Premium Discount Broker or a Full Service Broker.

The next step to find a brokerage house that provides the service you need, is financially sound and has a good track record. If you use a full service broker, then find a broker in the firm that provides good advice (particularly for people in a similar situation to yours), who understands your needs and goals, and with whom you feel comfortable. You can check to see if a securities professional has any pending disputes or disciplinary actions at the Financial Industry Regulatory Authority, offsite link an independent organization that regulates the securities industry.

It is advisable to tell the broker everything that's relevant to your investment decisions (including about your health condition).

No matter how much you trust a broker, keep in mind that you have final control - and that no one is more concerned about how well your investments do than you are.

Consider changing brokers if bumps appear such as churning: making transactions primarily for the purpose of making commissions.

If a broker harms you beyond normal investment losses, there are steps to take to get your money back.

For information, see:

Types Of Stockbrokers: Discount, Premium Discount, Full Service

There are three general types of stockbrokers: a Discount Broker, a Premium Discount Broker, and a Full Service Broker. They all have the same basic obligation: it's their job to see that what they advise or sell you fits your financial condition, sophistication, investment objectives and tolerance for risk. The difference is how much advice and other services they provide, as well as their charges.

Discount (Limited service) broker

  • In the pure form, discount brokers only provide hassle-free securities trading. They also make research available for you t o use, as well as tools that allow you to manage your own portfolio.
  • Cost to you is lowest of the three types of broker.
  • More and more discount brokers provide advice offerings, including computer generated planning tools that analyze your holdings and provide computerized advice. Some even provide access to advisers who can give guidance whenever you need it - if you ask for it. Advisers answer basic questions on portfolio planning, asset allocation and recommended funds. Some companies charge for the advice. (If you ask for advice, ask if the adviser works on a commission basis).

Premium Discount Broker

  • A Premium Discount Broker provides more investment advice than a pure discount broker. They generally also provide record keeping, portfolio-analysis tools, and more information. For example, at least one firm tells you the total shares you own in a company, even if the shares are spread over several accounts. At least one premium discount broker offers free banking services.
  • Premium discount brokers charge more than basic discount brokers.

Full service broker

  • A full service broker provides personal one-on-one advice on investments as well as makes the trades for you.
  • Full service brokers generally have different levels of service. The more service you want, the higher the price.

What To Look For Before Engaging A Stock Brokerage Firm

First find a brokerage firm that fits your needs and other criteria. If you choose a full brokerage firm, then identify a broker that works for your needs.

When vetting a brokerage firm:

  • Check into the condition of the company for which the broker works.
    • Is the company financially secure?
    • Does it have a history of financial security?
    • What is the company's legal history?
    • Keep in mind that The Securities Protection Investors Corporation insures brokerage accounts up to $500,000 plus up to $100,000 for cash claims. You can also ask how much additional insurance the firm carries.
  • Find out the amount of the commission (transaction costs) or other fees including service fees. (The more you pay in fees, the lower your return).
  • Ask about the firm's research and mutual fund offerings.
  • Does the firm provide access to independent investment research?
  • Does the firm provide free web planning tools? If so, do you find the tools user friendly?
  • Smart Money Magazine publishes a broker survey every year that is worth checking out: www.SmartMoney.com offsite link

You can check on individual brokers through the following resources:

You can check the legal history of a brokerage firm through the following sources:

  • National Association of Securities Dealers (self regulation). www.nasd.com offsite link, click on the BrokerCheck Program or call: 800.289.9999 (you can also check our individual brokers here for possible violations of securities laws.
  • Your state securities regulator for possible violations of state securities laws. To locate your state agency see: www.consumeraction.gov/caw_state_resources.shtml offsite link

If you decide to use a full brokerage firm, look for a broker that:

  • Has a track record of making money for clients - particularly clients who need to be more conservative in their investments.
  • Will build an investment model based on your individual time horizons, goals, risk tolerance and tax situation.
  • You feel comfortable talking about your financial and medical situation as well as your goals.
  • Caution: Do not use any broker who makes promises about a rate of return he or she will earn you.

What Do I Need To Tell An Investment Advisor?

Any good investment advisor will ask about your financial situation and your goals. She or he may also ask about your personal life.

It is advisable to also disclose your health condition to your advisor. You likely need more safety in your investments than the average person of your age and economic situation. You may also have an unexpected need for extra cash if your expenses increase or your income decreases.

If the state of your condition means you have a shortened life expectancy, and you have an idea what that could be, let the advisor know. Keep in mind that life expectancies are only statistical and do not predict the longevity of any particular individual.

To Learn More

Related Articles

Life Expectancy

How To Keep Control If You Use A Stockbroker

Even if you use a professional, it is advisable to keep control of the situation. After all, the professional works for you. No one cares more about your financial situation than you do.

You can keep control by doing the following:

  • Do your own basic research about your investments and whatever investments the professional suggests. It's easy to do on the internet. For example, see:
    • Value Line Investment Survey, www.ValueLineInc.com
    • A Bloomberg Terminal, www.Bloomberg.com
    • Check out the web site of any company in which you're interested.
    • You can obtain an annual report and other financial documents from the SEC (Securities and Exchange Commission), www.SEC.gov offsite link
  • Read magazines geared to help people with their finances such as Smart Money and Money.
  • Don't buy investments you don't understand.
  • If you have securities at more than one firm, consider consolidating them. You are likely to get lower fees and possibly better service.
  • Ask for all recommendations in writing.
  • Take notes about the important parts of each sales call, including date and time
  • Limit the broker's discretion to make trades on his or her own - possibly to zero.
  • Check each statement within days after receipt. It only takes a few minutes. (If you're traveling, you can likely check your statement online).

If You Are Considering Hiring An Independent Financial Advisor

In order to protect against the Bernard Madoffs of the world when engaging an independent financial advisor, it is advisable to take the following steps:

  • Confirm that your cash and securities will be held by an independent custodial institution such as a stock brokerage firm. (See the next section). Use of a custodian assures that your assets are not part of a Ponzi scheme which uses money from later investors to pay earlier investors.
  • Check to see that the firm for which the person works is financially solvent. While it is not fool proof, you can gain some assurance that the finances the company reports are accurate by checking the reliability of the company's auditor(s) - the independent experts that are supposed to independently review a company's financial statements to confirm that they reflect the company's actual financial situation. You can learn out about an auditing firm by checking the state agency that licenses accountants. For the agency's contact information, search on "Accountant Licensing Agency Name of State" or look in your Yellow Pages.
  • Check the financial advisor for education, experience and past problems. For instance:
    • Check the advisor's information filed with the correct regulatory authority.
      • Advisers with substantial assets under management must register with the Securities and Exchange Commission (SEC). You can ask the advisor for a copy of his or her ADV Part 2 form (which he or she is not obligated to give you until after being hired) or look at a copy yourself on the SEC's website. Go to www.sec.gov. offsite link Look for "Investor Information". Then click on "Check Out Brokers and Advisers", then on "Research investment Advisers" 
      • If not with the SEC, an advisor must register with the state. You can find your local agency at North American Securities Administrators Association: http://www.nasaa.org offsite link
    • You can also check:
      • Financial Industry Regulatory Authority at www.finra.org offsite link
      • National Futures Association at www.nfa.futures.org offsite link
      • If the person alleges that he or she is a certified financial planner, contact the Certified Financial Planner Board of Standards at www.cfp.net offsite link

When To Consider Changing Financial Advisors

The following situations would be cause to consider changing financial advisors. If you are damaged, they may also be grounds to recover damages. (To learn more, see: If A Stock Broker Harms You).

  • Misrepresentation: The broker makes inaccurate or misleading oral claims or provides false written information.
  • Churning: Frequent trades solely for the purpose of generating commissions. Courts look at a variety of factors, including the ratio of commissions to average account value. Churning can occur even if you approve each trade.
  • Unsuitability: A broker has a fiduciary obligation to provide advice that is consistent with your age, goals, income and experience with investing. If you tell the broker about your health condition, it also has to be considered.
  • Unauthorized trading. This type of trading breaks trust. It is also illegal.
  • Failure to recognize break points. Break points are a dollar amount at which fees are to be reduced.
  • Inappropriate investment suggestions. According to Bottom Line Personal, the following financial situations should send up a warning flag. They do not in and of themselves mean the advisor is acting for him or herself instead of you, but they do suggest you take the time to "trust but verify."
    • A brokerage firm's own mutual funds for which it charges a high commission. (You can compare commissions and returns mutual funds make in the sites listed in Survivorship A to Z's mutual funds document.)
    • An advisor suggests selling an investment that recently earned him or her a high commission. This is particularly so if the recommendation is to purchase another investment with a high commission.
    • Investments which have risk beyond what is reasonable for your health condition, age, income and net worth.
    • Investments with a guaranteed high return. The higher the return, normally the greater the risk. There is seldom a real guarantee when referring to a high return.
    • Municipal bond investments which have high transaction fees. Fees for buying municipal bonds are usually very low. You can get an idea of current fees by checking low cost firms such as:
    • Investments in securities which are not publicly traded. While private investments can be very profitable, they are also very risky. They are also difficult to sell because there is no ready market.
    • Transactions when the investment firm is a "principal" - which means the firm is selling you shares it owns rather than merely acting as agent.



What To Do If A Stockbroker Harms You

It is not enough to complain that your broker could have done better or that the investments the broker recommended went down in value - even if they went down a lot.

If you have been burned, consider the following steps:

Step 1. Consider the situation objectively. Is it a case of a loss which is inevitable when people invest or is there questionable conduct on the part of the broker or brokerage house? For example, did the broker do any of the following?

  • Choose investments which are unsuitable to your situation.
  • Not provide all the relevant facts about an investment, particularly risks which the broker knew about.
  • Provide information that is no true.
  • Violate a fiduciary duty to put your interests first. For example, by churning your investments when the broker makes money with each trade.
  • Unauthorized trading.
  • Failure to take action to prevent or respond to misconduct.
  • Failure of a manager to supervise broker employees.

 (To learn more about each, see: When To Consider Changing Brokers).

Step 2. If there is a misdeed, act quickly. The sooner you act after learning about a problem, the stronger the case.

Step 3. If the amount in question is sufficient, engage a lawyer who is expert in securities matters to contact the broker and obtain compensation for you. Following are some sources to help locate a lawyer with expertise in securities law:

If you cannot afford legal counsel, there is a small network of legal clinics run by law schools that will take on claims of $25,000 or less for people wtih incomes of up to $100,000. For excample, the Securities Arbitration clinic at Fordham University Law School provides free legal representation for aggrieved investors otherwise unable to afford legal counsel. http://law.fordham.edu offsite link. To find a clinic that covers your state, see: http://www.sec.gov/answers/arbclin.htm . (Keep in mind that during summer months the law students are on vacation so your case may be delayed).

Step 4. If you decide not to engage a lawyer: Write a letter to your broker and to the branch manager yourself describing your concerns with a date by which to reply (e.g. 30 days). A letter is preferable to a phone call because you may inadvertently say something which could weaken your case. (For safety, assume that all conversations about misdeeds will be taped by the brokerage - even if you're assured they are not).

Preferably have the letter reviewed by an attorney who is expert in securities matters before sending. If you can't afford an attorney, speak with the National Association of Securities Dealers (NASD). NASD can be helpful in these matters. (www.nasd.com offsite link or Tel.: 301.590.6500). Send the letters by a means which provides a receipt, such as U.S. Mail, certified mail, return receipt requested.

Step 5. If you do not receive a satisfactory response within your time limit, write the brokerage house's compliance department.

Step 6. Complain to the regulatory agencies: the Securities and Exchange Commission (SEC), the state securities regulator, and the NASD (National Association Of Security Dealers). Contact information follows:

Step 7. Finally, consider suing. If your agreement contains an arbitration clause as most do, you'll have to go to arbitration instead of court. If your claim is $50,000 or more, the arbitration will be in front of a three person panel including a representative of the brokerage industry. The other two do not have ties to the industry. If your claim is less than $25,000, there will be one arbitrator. If your claim is between $25,000 and $50,000, you can choose whether to have 1 or 3 arbitrators.

Lawyers may charge a contingency fee of up to 40% of your settlement or award - plus out of pocket expenses.

NOTE: Even if you are allowed to handle your case yourself, keep in mind that the securities broker and/or firm will inevitable hire a well-trained lawyer.