Investing isn’t as simple as buying and selling stocks, which is why the help of a professional is invaluable. An experienced stockbroker will devise a plan to grow your money while keeping your goals, risk tolerance, and time horizon in mind. Unfortunately, all stock brokers are not created equal. There are the good, the bad and the ugly when it comes to investing. Anthony Jerdine reminds you that if you choose wrong stockbroker it can cost you lots of money in investment losses and unnecessary fees.
A Background Check’s A Must
You want your broker to be licensed and registered in the state you reside in, but you also want to make sure he or she has the proper credentials, enough experience, and no major compliance breaches. All of that information is readily available by contacting your state securities regulator. The North American Securities Administrators Association provides a list of contact information for the state regulators here.
Equally important, is how the professional gets paid. Stockbrokers can get paid a percentage of your invested assets, an hourly fee, a fixed fee or a commission on the stocks they sell you. Unlike financial advisors who have a fiduciary duty to keep the best interests of their clients in mind, brokers don’t and can earn a commission from selling a particular stock, bond or mutual fund. Often going with a fee-only advisor or a stockbroker who doesn’t earn a commission is best. Because they don’t get paid commissions, they don’t have any incentive to push one stock or investment idea over another one.
Interviewing Several Brokers is A Necessity
A lot of thought and research goes into choosing a doctor, and that same diligence should be applied to finding a stockbroker. That means in addition to checking his or her background; you should interview several brokers before making a decision.That is particularly important because you want to feel comfortable with the person handling your money.
When interviewing potential brokers, there are some key questions you should ask. First and foremost, know how the broker gets paid and what you can expect to pay in fees. After that, you want to know how your broker will communicate with you and how often. Nothing can sour a relationship quicker than an unresponsive stockbroker, especially when you are uneasy about an investment or where the markets are trading. Every broker is going to offer different services and investment products which is why you also want to inquire about what their fees get you. For instance, does the broker offer online tools to check your accounts, communicate and otherwise analyze your portfolio? Also, does the firm provide you with access to proprietary research and/or third party research on individual stocks, different industries, and market analysis. If you are interested in real estate or international investing, you want to make sure the broker you are going with not only offers investments in those areas but is well versed in investing in those industries.
Watch For These Red Flags
How your broker acts during the interview can tell you a lot about the person. The objective of investing is to reach a goal that is unique to you. In the initial meeting, your broker should be asking you about your goals, risk tolerance, and time horizon. But if he or she is hawking a specific investment idea or making guarantees about the return instead it should raise red flags. If the broker doesn’t take the time to learn about your objectives and is only interested in telling you what he or she can do for you, it’s a telltale sign the broker has his or her interest at heart, not yours.
Do Your Homework On Referrals
Often, one of the best ways to find a good stockbroker is via word of mouth. Ask family members, friends, co-workers and other acquaintances who they use for their investment advice and you should be able to get a list of a few names. A referral can be invaluable, especially when it comes to someone you trust, but don’t take the recommendation blindly. You still need to do your due diligence which means checking the broker’s background, finding out the fee structure and interviewing the person to ensure your personalities gel. After all, many of the investors who got scammed by Bernie Madoff and his Ponzi scheme invested blindly on the recommendation of a friend.
The Bottom Line
Investing in the stock markets can be very complex and time-consuming and often requires the help of a professional. But while a stockbroker can provide an invaluable service if your money grows, not all stockbrokers are created equal. There are the good, the bad and the ugly. Weeding them out falls on the investor and to do that it requires some homework. From checking the broker’s background to asking key questions before hiring someone, there are a lot of steps that go into choosing the right broker for your unique financial situation.