David R. Evanson

Privately Published, Spring, 1995

If you are committed to investing, but understandably overwhelmed by either the sheer volume of labor, or perhaps some of the technical aspects, then you need a broker to help you along the way. Itzzs that simple.

Finding prospective brokers is easy. You simply need to ask for referrals among friends, family or business associates whom you respect.

But what may not be so easy is choosing from three or four candidates the broker who has a style and personality which is complementary to your own. Itzzs a lot like finding a doctor. There are questions about training, skills and competency, but the success of the relationship will likely rest on how well your personalities fit together.

This truth offers perhaps the first genuine opportunity to find the broker whozzs right for you: he or she has got to be willing to take some time out to meet with you personally. If a broker wonzzt do that, then investors should question whether he or she is worthy of the business.

Vital Issues
There are several important areas to cover with your would-be financial advisor during this initial meeting or in subsequent evaluations. With many of these questions there is not necessarily a right or wrong answer. There is only the answer that makes you comfortable.

For example, you want to find out the frequency of contact the broker is going to provide to you about your account. You might want daily or weekly updates, when the broker feels that a quarterly, or perhaps even an annual review is sufficient. Not getting it right in the beginning may leave you feeling ignored and unhappy down the road.

Another vital consideration: does the broker feel comfortable working with equities as well as fixed income instruments? This is important because todayzzs investment environment requires a balanced portfolio.

Next, you want to know how the broker is compensated. For instance, your broker could earn what is known as a “wrap” which is a single fee, generally a percentage of your assets, that would cover all of your trades, execution and account servicing. Conversely, your broker might be on straight commission. Then there are combinations. For instance, at some firms, brokers are compensated with lower wrap fees and an administrative charge per trade in which the broker does not participate. And while each system has its advantages and disadvantages, once again, the critical issue is whether or not you are comfortable with the way your candidate is compensated.

Then there is the issue of inventory. How does the firm deal with the sale of stocks or bonds that it may have a position in, or for new issues, when the firm is a member of the underwriting group that is distributing the stock to investors? For example, will you as the investor know when you are buying an zzin housezz product? And does the broker receive a higher fee for in-house products? As will be seen later on, this issue of where the investment comes from, may ultimately play a large role in the broker and brokerage firm which you select.

Finally you might want to ask to see a brokerzzs “U-4” a uniform industry application which shows his or her background and any infractions and disciplinary actions. You might also ask to see one on the brokerzzs firm as well. References to certain violations do not necessarily mean you should avoid a broker or a firm however. There are several technical issues that a broker could unwittingly run afoul of. And regarding infractions, if there are several and they seem to be centered around the same issue it’s generally less cause for concern than infractions which run the gamut. If a broker doesnzzt want to provide you with a U-4, that may not be a good sign. But if you still want to work with that broker, or perhaps want to get a report without the broker knowing, you can call the National Association of Securities Dealers at 800-289-9999.

Firm Concerns
For some investors, the name recognition of a high profile national firm is an irresistible draw to that firmzzs brokers. Many of these feelings are merited. The major wire houses are reputable, have financial strength and hire the kinds of brokers that first time investors should have no concerns about doing business with.

But sometimes prestige carries a price. The major firms are not just distributors of investment products, but they are also manufacturers as well. And that means the broker may be under pressure to sell the firmzzs IPOs, mutual funds, unit trusts or insurance products. Itzzs not that these are necessarily bad products. They may be great products, but it may represent a limiting factor for the investor and may not be transferrable to other firms should the investor want to consolidate his or her accounts.

By contrast a smaller firm, without a national franchise, without perhaps even a name that you recognize, can have access to a full range of products without any bias other that the return it generates and the suitability for the investor at hand.

One major issue to consider with regard to smaller firms, is whether or not they are self clearing. That is, do they settle their own transactions and manage their own back office? Or do they have what is known as a clearing relationship with one of the major firms or specialty clearing houses to do this work for them? The clearing relationship with a major firm can pay a real dividend for the investor. If the account is handled by a full service clearing operation, the customerzzs account can be easily transferred.

While the Securities Investor Protection Corporation (SIPC) offers all investors up to $500,000 of protection upon liquidation of the firm, if the firm runs into trouble, settlement when a small self clearing operation is involved, could result in lengthy delays before the investor can access his or her own funds again.

When trying to find a broker, the size of the firm he or she works for is not the primary issue. Itzzs the strength of that underlying personal relationship. With that foundation in place, the rest should take care of itself.

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Now that youzzve gotten an orientation on some of the basic objectives and principles of investing, be sure to read this column over the next few months which will provide details on several major investment categories.