Working with a Stockbroker
As an investor, you have multiple options for choosing a stockbroker. Before you make your selection, you need to evaluate your needs, comfort level, personal commitment, and available time for research, as well as your desire to be personally involved in your investment portfolio. Also be sure you are aware of any fees associated with your choice.
Discount Brokers
If you are ready, willing, and able to investigate potential companies on your own, then a discount broker may fit the bill. Many individuals find that taking charge of their investments is an empowering experience. Once they become acquainted with all of the available information, many investors feel like they are in the best position to handle their own investments, and are happy to be in the driver's seat.
Commissions charged by brokerage houses were deregulated in 1975, and this decision was truly the beginning of the ascent of the discount broker. Trades could be conducted for far less money than investors were used to paying at full-service brokerage firms like Smith Barney and Morgan Stanley. Discount brokers are now offering more services than ever before. Combine that with today's new and faster technology, and investors have all of the investment information they need right at their disposal.
With the explosive development of the Internet, the opportunity for self-education is virtually limitless. Beginning investors now have access to many of the same resources as full-service brokers. With this access to data, the demand for full-service brokers is diminishing. A little enthusiasm and determination on your part can pay off. With the wealth of online information, you can stay informed on everything from a company's new introduction to the ten most highly traded stocks on any given day.
Ameritrade and other online brokers are available only on the Internet; there is no option to walk into a traditional broker's office and talk with someone face-to-face. Online brokers are expanding the range of services they offer over the Internet and are starting to catch up with full-service brokers in areas like float allocation and research distribution.
Some of the best Internet sites were created by financial institutions, and investors have access to everything with just the click of a mouse — from real-time quotes to analyst reports to stock market basics. You can even communicate with other investors, who may offer you some great investment ideas. The proliferation of online discount brokers has made it possible to trade around the clock for a nominal fee. In some cases, you can make trades for under $10. Trading online is ideal if you have done your homework and know exactly which stock you want to own.
Full-Service Brokers
If you want someone else to do most of the legwork, you might opt for a full-service broker. Of course, full-service brokers charge a premium for their input. There is no guarantee that a full-service broker will steer you in the direction of massive capital gains. It is also true that many such brokers tend to pay more attention to their large accounts (clients investing more than $250,000, for example) than the smaller ones.
Some experts believe that if you have investments totaling more than $100,000, you may want to explore the possibility of using a full-service broker. Find a broker who both shares your basic investment philosophy and gives you several investment options to choose from. Choose a broker with a minimum of five years of investment experience. You want someone who has traded in both bull and bear markets.
If you want to work with a full-service broker, get a reference from someone you know and trust. Be on the lookout for brokers who engage in churning, a term for trades conducted purely to generate commissions. Churning is especially beneficial to brokers who work on commission — the more trades they make, the more pay they take home.
It's perfectly acceptable (and advisable) to interview potential brokers. Ask how long they have been in this business and about their formal education, their investment philosophy, and what sources they use to get the majority of their information. You may want to find out which investment publications they read regularly and which they find most helpful and why. Find out if they rely only on their brokerage firm's reports when making stock recommendations. You can also ask more pointed questions, like how their clients fared during the recent bear market, or what strategies they use to protect their clients from downturns. Also make sure the broker provides you with a written list of up-front fees you'll be charged, along with an explanation of when charges will be incurred. If the broker gives you the runaround or refuses to answer your questions, find someone else to work with.
Monitoring the Brokers
Becoming acquainted with the broker fee structure is crucial. In many cases, you may be charged for services you didn't know you were getting — and wouldn't use even if you knew you could. You also want to inquire about the fees associated with opening, maintaining, and closing an account; getting checks; participating in investment profiles; buying and selling securities; and attending various seminars. To circumvent potential discrepancies, it's important that you obtain this information in writing and in advance — and not after the fact.
The Financial Industry Regulatory Authority can answer your questions about the practices of a particular broker by looking up his past record regarding any disciplinary actions taken or complaints that have been registered against him. They can also confirm whether the broker is licensed to conduct business in your state.
FINRA was created in July 2007 when the National Association of Securities Dealers (NASD) merged with the regulation committee of the NYSE. Before that, NASD took the lead with consumer-broker issues. The NASD also had primary responsibility for the running of the NASDAQ exchange and other over-the-counter markets, as well as administering licensing exams for financial professionals.
In addition to being the primary nongovernmental agency dedicated to protecting the investing public, FINRA also regulates every securities firm that operates in the United States — more than 5,000 firms. To get the job done, FINRA employs about 3,000 professionals throughout the United States, with its main offices in New York City and Washington, D.C.
Financial Planners
Another stock trading option is to hire a professional financial planner. These people go beyond handling just your investments — they can aid you in matters relating to insurance, taxes, trusts, and real estate. The cost of doing business with a financial planner can vary considerably. If you opt for a financial planner, it may be better to pay a set fee rather than commissions. If the planner works on commission alone, it may be in her best interest to encourage heavy trading. While some planners charge a flat hourly rate, others may charge a fee that is based on your total assets and trading activity. In this type of arrangement, you are responsible for paying the financial planner even if you do not follow any of her suggestions. Other planners operate with a combination of fee-based charges and commission. Here, you may pay less per trade, but you are also responsible for paying additional fees.
