Robin Carnahan, Secretary of State
Securities Division
600 W. Main Street
PO Box 1276
Jefferson City, MO 65102
(573) 751-2061
How to Choose a Stockbroker
A Guide for Beginning Investors
This pamphlet is intended to provide a sound
foundation on which to build a good working relationship
with your stockbroker. You should choose
your stockbroker with the same care that you
choose other professionals. Your stockbroker
should be someone who will listen attentively as
you explain your financial needs and who can be
trusted to carry out your wishes.
In general
The person who most people think of as a stock
broker is actually a “registered representative”
or “account executive”. This is the person who
you, as customer, will be primarily dealing with.
The company that your account executive works
for is a broker-dealer of securities. A broker-dealer and its account executives make money through
commissions on securities transactions. A fee is
charged whenever you buy or sell. Your brokerdealer
and account executive do not make any
money from setting up a long-term financial plan
for you. This is an important factor to consider: if
you are seeking advice on balancing your real estate
holdings, life insurance coverage, cash and
securities, then you need to look for an investment
advisor (sometimes called a financial planner),
who will charge a fee for drawing up a total financial
plan for you. The financial planner may work
with an account executive to manage your securities
holdings in harmony with your total financial
plan. In some instances an individual may be registered
to act as both an account executive and
financial planner.
Full service or discount?
The first thing you should consider is whether you
want a full-service broker or a discount broker. A
full-service broker will recommend particular securities
for you to buy; a discount broker only
places the orders you give. The advantage to having
a full-service broker is that you have a professional
on whom you can rely for services and advice.
If you don’t understand a kind of transaction,
your full service broker can explain it to you.
The disadvantage is that a full-service broker is
more expensive. If you do all of your own investment
research and call your broker only when you
want to place an order, then use of a discount broker
may save a considerable amount of money
over time. Whether you choose a full-service broker
or a discount broker, be certain that the broker
you are considering is registered and in good
standing with the Securities Division of the Office
of the Missouri Secretary of State.
After you have chosen a broker, you still may
be able to save money by comparing commission
rates. Although there is an acceptable range of
commissions, specific rates can vary from firm to
firm.
NASD or SIPC
The NASD (National Association of Securities
Dealers) is a national organization for broker-dealers
in the United States. The NASD serves many
functions both to its members and its members’
customers. One of the most important functions
of the NASD is the requirement that NASD members
and their employees abide by the “Rules of
Fair Practice”. When followed, the rules of fair
practice are designed to ensure that securities business
is conducted in a way “consistent with just
and equitable principles of trade.” The NASD
watches over its members and takes disciplinary
action against those members that violate the rules.
Another important function of the NASD is
its arbitration proceeding, which provides a lowercost
alternative to litigation should you have a dispute
with your broker or account executive.
However, arbitration agreements do not preclude
your right to a trial should a dispute arise.
SIPC (Securities Investors Protection Corporation)
is an organization that protects investors who
have money or securities in a brokerage account
when the broker goes bankrupt. SIPC does not insure
your investment in any way, but protects your
securities or money when they are in the custody
of your broker.
Choosing your account executive
The following is a list of characteristics and qualifications you should establish in choosing your
account executive:
—Easy to talk to. You should feel comfortable
with your account executive. The more your account
executive knows about your financial situation
and goals, the better your account will be
served. You will be giving your account executive
some very personal information. If you feel uncomfortable,
you may not give your account executive
as much information as might be needed to
properly service your account.
—Doesn’t pressure you. You need to keep in
mind that your investments must please you, not
just your account executive. A good account executive
will take the time to find the investment strategy
that is best for you and won’t put you into a
certain investment just because other customers
are.
—Pays attention and acts on what you say. If
you tell a good account executive that you don’t
want a certain degree of risk or a certain type of
investment, then that account executive won’t be
constantly recommending that investment to you.
On the other hand, a good account executive will
try to find out why you don’t want a particular investment
and may even recommend the investment
if he or she believes that such an investment is best
for you.
—Explains things until you understand. The
securities business is very complicated and can be
difficult to understand, especially if things aren’t
explained properly. A good account executive will
provide you with information and will take as
much time as necessary to explain a proposed
transaction until you understand. Remember that
this is your investment—you have every right to
understand exactly what is going to happen with it.
—Registered with the Securities Division and
does not have a history of customer complaints.
The Securities Division keeps a register of Missouri
account executives and has their reported disciplinary
history on file. While an occasional customer
complaint may be inevitable, an account executive
with a history of customer complaints
should probably be avoided by the beginning investor. To find out about your account executive’s
registration and history you can call the Securities
Division, or you can ask your account executive
directly.
New account forms
Once you have chosen a broker and account executive, you will be asked to fill out new account
forms. These forms usually require you to give
personal financial information and to state your investment
objectives. It is very important that you
provide accurate and frank responses. Under Missouri
law, your account executive is obligated to only recommend transactions believed to be suitable
based on your financial needs and objectives.
Keep in mind that you are paying for the services
of an expert whose advice can only be as good as
the information it’s based on. Be sure to fill in all
the blanks, marking through those that do not apply,
and sign the form. NEVER sign a blank form.
Your investment objectives
Before you fill out your new account form and
begin to invest, think about exactly what you want
to accomplish by investing. Your goals can range
from a desire to put your money in as safe a place
as possible where it can grow at at least the inflation
rate, to a desire to risk everything for the
chance to hit it big.
The rule of thumb to keep in mind is that the
lesser the risk, the lesser the return. When you
have your investment goal clearly in mind, explain
your ideas to your account executive. It will be
your account executive’s job to help you translate
those goals and ideas into an investment strategy
that meets your requirements for both risk and return.
Get all the information you need
One of the best ways to safeguard your investment
is to understand what your account executive is
doing in your account. The first way to accompplish
this is to ask your account executive. If your
account executive suggests that you invest in a “preferred stock”, ask about the difference between
that and common stock. Ask about the differences
in price, in dividends, in rights upon merger
or acquisition of the company, in voting rights
and in your rights and priority if the company in
which you are investing goes bankrupt.
The second way to get information is to do some
research on your own. There are numerous good,
solid publications on the fundamentals of investing.
Your broker may publish some of its own. For
example, Merrill Lynch publishes a paperback
book, “How to Buy Stocks” available at a small
fee. Your local library or book store may have
copies of that or other excellent guides for beginning
investors.
Know what’s happening in your account
After every transaction, you should receive a trade
confirmation and every month you should receive
a monthly statement. Review those documents
carefully and make certain that they are correct in
reflecting what happened in your account and that
what happened was what you wanted to have happen.
If you don’t understand the confirmations or
the statement, don’t be shy about having your
account executive review them with you—it’s a
service you are already paying for. Keep your own
complete set of records about your account, and
include notes of conversations with your account
executive and any correspondence from your broker
or account executive.
If something goes wrong
If you notice that something seems wrong on your
statements or in your account, complain immediately
to your account executive. Always follow up
every telephone call complaint with a letter to confirm
the matters discussed on the telephone. If you
do not recieve a satisfactory answer to your complaint
from your account executive, complain to
the branch manager of the broker, then to the
Compliance or Legal Department. If you still have
not received a satisfactory answer, then file a complaint
with the Securities Division.
Look ahead when
you invest
You will be tempted to invest in particular securities because of good rates of return or apparent
safety, but you should also take a moment to consider
other factors that will become more important
as you continue to hold the securities. One
such factor to consider before you invest is whether
there is a ready market for the securities should
you decide to sell them. Another factor may be
voting rights that do or do not attach to the securities
(voting rights can affect management decisions,
and in the long run, your return). You should
find out whether the securities are restricted in any
way.
Your account executive should be able to answer
your questions and, in many cases, you will be provided
a prospectus that should contain all material
facts about a proposed investment. If you are given
a prospectus, take the time to read it, or at the very
least, read the risk factors and history.
There is always risk!
Whenever you purchase securities, there will always be a risk of loss. Although in some cases the
risk will be extremely small (as is the risk of the
U.S. Government being unable to meet its debt
obligations), in some cases it will be very great (as
is the case of certain options transactions where the
chance of unlimited loss is almost 50-50, depending
on the type of transaction). There is always a
risk, when investing in a private company, that the
company might go bankrupt. Bankruptcy happens
to all sorts of companies, even old, reputable companies
that seem like they would provide a
rock-solid investment. For this reason, it is usually
a bad idea to invest all of your money in any one
security. If safety of investment is one of your
goals, you and your account executive should exexplore
diversification of your account to increase
safety.
Services of the Missouri Division of Securities
The Missouri Securities Division is a division of
the Office of the Secretary of State. The Securities
Division licenses broker-dealers and account executives (who hold “agent” licenses). The staff of
the division is available to answer questions, take
complaints or check licenses and disciplinary history
between the hours 8:00 a.m. to 5:00 p.m. The
office is located in Room 229 of the James C.
Kirkpatrick State Information Center in Jefferson
City.
Inquiries about licenses:
(573) 751-2061
Complaints and questions:
(573) 751-4704
Toll-free hotline:
(800) 721-7996
Toll-free Investor Protection Hotline: 800-721-7996
Report complaints or make inquiries