Commonly asked questions to Brokers.

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How to Grill Your Stockbroker

Stockbrokers and financial advisors typically focus on the mechanics of investing – the dividend, the strategy, or past performance. When they do, investors often become overwhelmed by the conversation.

To break through that and improve their comfort level, investors should instead focus on the more important issue at hand: the credentials and character of the person peddling those investments, said Tamar Frankel, a law professor at Boston University.

“I want to shift the focus from what is being sold to who sells it,” she said.

An expert in financial regulation and fiduciary law, Frankel’s latest research examines the role of trust in various professional relationships, including the relationship between a broker or advisor and his or her client or potential client.

Frankel’s basic premise is that no question is a stupid question. Since brokers and investment advisors are not regulated by the same fiduciary standards that govern, say, employer pension funds, investors must protect themselves.

That can be difficult to do when the broker is throwing around unfamiliar terms. She recommends investors come armed – with questions – to their meetings with brokers. She has put together a deceptively simple list of questions. If the broker refuses to answer a question – his or her right – then the investor has already learned something important.

Here are three of Frankel’s 15 questions and her thinking behind them.

Question: “Are you a registered investment advisor, registered broker dealer, or both?”

Rationale: Frankel’s message here is: assume nothing. Investors should be certain that the investment advisors or brokers being considered meet the professional standards established by their own profession. Even better, check out their credentials beforehand but ask the question anyway.

Question: “What commissions or fees do you receive, in addition to the amounts that I would pay you?”

Rationale: Details about commissions brokers receive from the financial firm that either created or markets the investment security are crucial to understanding the financial incentives motivating your broker – and, in turn, the impact those incentives may have on you.

There are also myriad, undisclosed commission arrangements between Wall Street firms and brokers, private investment houses and brokers, and mutual fund companies and brokers and advisors. One simple example is life insurance. It is a difficult product to sell because “no one wants to buy death,” Frankel said, so insurance companies pay high commissions to brokers who sell their policies.

Question: “Can I trust you to do the best for me?”

Rationale: Federal securities law requires that stockbrokers have a reasonable basis for recommending investments that are “suitable” for their client. The Securities and Exchange Commission wants brokers be held to the higher fiduciary standard of always acting in the client’s interest. But the Consumer Federation of America said the proposal is bogged down in politics and bureaucracy. Frankel said brokers are fighting that change.

When a broker suggests a product, she said, the client should know whether the broker is recommending it or selling it. “If it is advice, then I want to make sure that you are trustworthy. If it’s sales, I’ll decide whether I want to use it or not.”

This is Frankel’s full questionnaire:

1. Are you a registered investment advisor? Or a registered broker dealer? Both?
2. How long have you been a broker?
3. Do you have contacts with insurance companies and are you selling annuities (fixed and variable)?
4. What commissions or fees do you receive, in addition to the amounts that I would pay you?
5. Are you selling only investments offered by your organization, or are you selling investments offered by others?
6. What investment or trading strategies does your organization recommend to clients? Long- or short-term purchases, short sales, margin transactions, or options?
7. Who is your supervisor? Please note name and telephone number.
8. Where do you keep the clients’ money? Who is the custodian? Please note name, address, and telephone number. Can I ask the custodian directly for information about my investments?
9. Who is your accountant? Please note name, address, and telephone number.
10. Do you trade in the securities that you recommend to me? Do you short or buy options in the securities that you recommend to me?
11. Did you have any past or present disciplinary and bankruptcy proceeding?
12. Do you know whether there is any reason for me not to buy or sell the securities as you recommend? (You do not have to tell me what the information is.)
13. Who told you to recommend the particular securities?
14. Can I trust you to do the best for me?
15. Why do I ask you to sign the answers to these questions?

Broker-dealers representatives are fighting hard against a rule that would regulate brokers as advisors under the Advisers Act of 1940. That is, they fight against brokers’ liabilities and responsibilities as fiduciaries-trusted persons. They say that it is enough that the brokers offer “suitable” investments and give information about the investments.

I want more than that. I want the broker who says that he is my trusted advisor truly to be my trusted advisor and to recommend not merely suitable investment, but the best investment for me. This is why I ask these questions.

Please sign here:



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One Response to How to Grill Your Stockbroker

  1. Mike Wilson says:

    These are EXCELLENT questions! Suitable investments mean that a broker knows enough about your situation to justify a recommended investment, and that’s a good start. But to finish well, an investor wants what is best for his or her situation–and that’s the standard for a fiduciary. A fiduciary must do what is best for the client, whereas a suitable investment is simply one that is “okay” for the investor.