I Take Thee as My Lawfully Wedded Broker
The investor & broker
relationship is like a marriage. You are legally joined and, hopefully,
share common goals - the nurturing and protecting of your investments. In
previous Newsletters we offered advice on selecting investment brokers
based on the features they offer. While this should be considered, it is
even more important you make the decision based on the security of your
money. We will provide basic
information to help you select a brokerage firm and sales representative,
make an initial investment decision, monitor an investment and address an
investment problem. This is intended to help you identify questions you
need to ask and warning signs to look for in order to avoid possible
Your Broker -
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:
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.
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.
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.
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.
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 (202) 371-8300.
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 with them.
Making An Investment -
The New Account Agreement
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 agreement.
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
- 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
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 do not 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 investing.
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 representative.
Nobody invests to lose money. However, investments always entail some degree
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
- The past success of a particular investment is no guarantee of future
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."
send money to
purchase an investment based simply on a telephone sales pitch.
make a check out
to a sales representative.
send checks to
an address different from the business address of the brokerage firm or a
designated address listed in the prospectus.
If your sales representative asks
you to do any of these things, contact the branch manager or compliance
officer of the brokerage firm.
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
Certain activities may indicate
problems in the handling of your account and, possibly, violations of state
and federal securities laws.
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 product."
- 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
- 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
- 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 account statement.
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 explanations.
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
450 5th Street, NW
Washington, DC 20549
Office of Investor Education and
The SEC has eleven regional and
district offices across the country. Check the on-line directory to find out
which SEC office is closest to you (http://www.sec.gov).
North American Securities
Administrators Association, Inc.
10 G Street, NE
Washington, DC 20002
Each state has its own securities
regulator. Refer to the on-line directory of state securities regulators to
obtain the address of your state regulator.
American Stock Exchange, Inc.
86 Trinity Place
New York, New York 10006
Boston Stock Exchange, Inc.
One Boston Place
Boston, MA 02108
Chicago Board Options Exchange,
400 LaSalle Street
Chicago, IL 60605
Chicago Stock Exchange, Inc.
400 LaSalle Street
Chicago, IL 60605
Cincinnati Stock Exchange, Inc.
205 Dixie Terminal Bldg.
Cincinnati, OH 45202
Municipal Securities Rulemaking
1818 N Street, NW
Washington, DC 20036
National Association of Securities
1818 N Street, NW
Washington, DC 20036-2491
New York Stock Exchange, Inc.
11 Wall Street
New York, NY 10005
Pacific Stock Exchange
301 Pine Street
San Francisco, CA 94104
Philadelphia Stock Exchange, Inc.
1900 Market Street
Philadelphia, PA 19103
Disclaimer - The information contained in
the documents in this website should not be construed as an offer to
sell, or a solicitation to buy, any securities referred to herein.
The information is considered reliable, but not guaranteed as to
accuracy or completeness. TheStockAdvisor specifically disclaims
any liability in connection with the documents and/or information
contained within this website. See complete