Securities Arbitration Lawyers Blog6 Questions You Must Ask Potential Brokers Before Handing Over Your Money
It’s time to start looking beyond low commissions
Maybe you’re a new investor. Maybe you’re looking for a new broker after getting burned. Either way, you’re entitled to know a few things about the person you’ll trust to act as the guiding intermediary between you and securities traded on the market. But what questions will really help you vet this person? What answers are just big red flags? While the following questions are absolute musts, don’t be afraid to ask more and dig deeper. The only brokers who fear your inquiries are those with something to hide.
1. Do you owe me a fiduciary duty?
Generally speaking, there are two types of financial advisors. The first are FINRA registered stockbrokers. This is the most common type of financial advisor and they frequently use fancy titles such as investment advisors. They are governed by FINRA’s suitability rule and do not owe their clients the highest duty of care.
The second type of advisor is a registered investment advisor governed by the 1940’s Securities Act. Registered investment advisors generally handle discretionary accounts and are fiduciaries to their clients, meaning they must always act in their client’s best interest and cannot have any undisclosed conflicts of interest. It is important to know what duties and obligations your financial advisor owes to his clients.
2. How (and how much) do you get paid?
While this seems like a hard-hitting question to start with, it will help you weed out the ones with whom you don’t want to work and identify the ones with whom you might want to work. Simply put, most brokers get a fixed percentage of your account total. When they advise you which stock or funds to invest in and the funds grow, so do their fees.
They might also get paid extra fees to invest your money in funds that their firm has interest in—and that is something you, as an investor, need to be aware of. You want a financial advisor who steers you toward investments that are in your best interest, regardless of where they come from.
3. You work for a big firm – why should I trust you with my money?
It’s true—stockbrokers and financial advisers are paid to sell investment products. In bigger firms, the pressure to produce sales and earn the resulting commissions is relentless. Some big firms will incentivize their brokers to sell the firm’s own funds by offering bigger commissions or bonuses. Brokers are pressured to meet sales goals not only to make an income, but sometimes to keep their jobs.
When considering a broker with a large firm, this question is fair and valid. You want to work with someone who is straightforward and honest, and while it is hard to gauge honesty, you need to be aware of the industry practice and be as upfront as possible about your concerns with your potential financial advisor.
4. You work for a small firm – why should I trust you with my money?
It’s still true—stockbrokers and financial advisers are paid to sell investment products. In smaller firms, the pressure to produce sales and earn the resulting commissions can be just as relentless as it is in bigger firms. So again, it is up to you as the investor to ask hard-hitting questions in order to gauge your potential broker’s integrity. And again, that is a hard item to gauge, but these questions have to be asked and answered in order to create a sense of trust.
5. What is your track record within the industry?
In this case, you don’t have to be an expert in the financial industry and its workings. Before meeting or speaking with a potential stockbroker or financial adviser, it is imperative that you, the investor, do some homework. Fortunately, there is an industry watchdog in your corner.
The Financial Industry Regulatory Authority, or FINRA, is an independent, not-for-profit organization whose mission it is to protect investors by “making sure the securities industry operates fairly and honestly.”
Using FINRA’s BrokerCheck website, you can research your potential stockbroker or financial adviser’s career history and gain insight into his or her track record within the industry.
6. Are you willing to fully disclose any conflicts of interest, compensation and any other answers I may seek in writing?
The answer to this should make it crystal clear as to whether you want to entrust your money with a particular stockbroker or financial adviser.
As in any major financial decision, it is best to shop around to find the best option to help you achieve your financial goals. While many brokers will press you to give them your business from the moment you say hello, don’t be afraid to make it clear from the beginning that you are speaking to several brokers and are in the decision-making process.
Don’t be afraid to ask questions and expect straight answers. This is your money. And if they don’t give you straight answers now, what kind of answers can you expect once they are handling your money?
When investors have suffered losses due to the misconduct of a financial advisor or brokerage firm, their only avenue to loss recovery is through securities arbitration. Silver Law Group is a nationally recognized securities arbitration law firm representing investors worldwide. We work on a contingency fee basis to recover investment losses caused by broker misconduct. Contact us today for details or to have your case evaluated by one of our experienced securities arbitration attorneys.