Published March 2008
Savvy Investor:
How to Check Out Your Investment Broker or Brokerage Firm
Tips for putting your nest egg under the right hen.

By Ann Springer and Scott Springer, MBA

You wouldn’t rent out your house to a stranger or hire a nanny without doing a background check on him or her, and you shouldn’t entrust your investments with someone you hardly know, either.

Doing your homework before you select a broker to handle your investments can save you from a negligent or fraudulent broker that could cost you your financial future, says John Tarazon, an investment adviser representative and financial planner who works as an independent contractor for ING Financial Partners, and is based in Oxnard, Calif.

While fraudulent and negligent practices don’t affect a large percentage of the population, you should still take steps to prevent them from happening to you. “It doesn’t happen to a lot of people, but it does happen all the time,” Tarazon says.

Tarazon recently worked with a married couple, both school teachers in their mid-‘40s, who had no clue what was transpiring with their hard-earned money that they’d been setting aside for years. As Tarazon researched their investment portfolio he discovered the products they’d purchased from their original broker weren’t providing the secure future they had thought they would. “They completed trusted the person they were dealing with and they had no idea what product they were in,” Tarazon says.

Fortunately, this couple still had time to turn their investment troubles around. Others, however, could lose everything and not discover their problem until it’s too late. Tarazon hears stories like this from intelligent professionals, such as doctors and engineers, who just don’t speak investment language. “They’ll hand over their investments, and their futures, to someone they trust and then they’ll lose everything,” he says. “It really bothers me to hear that people get burned.”

Where There’s Smoke, There’s Fire
Tarazon recommends you ask other professionals that you trust with sensitive matters– such as an accountant, a lawyer, or an insurance representative—for a referral instead of opening the yellow pages to pick a broker.

Once you have several recommendations from a trusted third party, Tarazon recommends interviewing several brokers to look for warning signs before making a final selection.

Below are a few questions that you should ask to determine which broker will best meet your financial planning needs. A few phone calls initially may keep your nest egg safe from an unsuspecting predator.

1. What is your employment background? More specifically, you should ask prospective brokers how long they have been in business, in which states are they licensed, and what their license numbers are. Once you’ve obtained this information you can verify their resumes online with public information with the Securities and Exchange Commission (http://www.sec.gov/investor/brokers.htm). You may also choose to obtain a Central Registration Depository (CRD) report through your local state securities regulator. The NASD can also provide you with background information, but may not be able to provide you with information that your state organization can offer. Stockbrokers and brokerage firms are not notified about requests to their record.
   
   
2. How will you be compensated? “You need to be very blunt about this,” Tarazon says. “The financial planner should not hesitate to tell you the answer either.” If they’re hesitant to let you see their commission schedule this may be a red flag, he adds. Brokers may charge a commission, a one-time fee, an hourly fee, a salary from the company they work for, or a combination of fees.
   
   
3. Do you have Errors and Omissions Insurance (E&O)? If so, how much is your coverage? E&O is for financial planners and brokers what malpractice insurance is for doctors. In the case that you would need to sue your planner, he or she should have adequate insurance to cover the judgment. Tarazon says this coverage should be generous and cover millions of dollars of loss.
   
   
4. Have you ever been publicly disciplined for unlawful or unethical actions, or been sued by a client who was unhappy with your services? Use the internet to verify that the person you’re considering doesn’t have any marks on his or her record. At the California Department of Insurance website (http://www.insurance.ca.gov/) website you can enter either the name of the broker or his or her license number and find out if the license is current, if the license is suspended, or if it has ever been revoked. In some cases, individuals have used old business cards to lure trusting consumers into a scam, Tarazon says. Other resources you can use to verify backgrounds include the National Association of Securities Dealers (NASD), and the Certified Financial Planner Board of Standards, Inc.
   
   
5. What are your qualifications? The term financial planner is widely used by many professionals, so it’s important to understand some of the terminology and possible certifications that these individuals may hold. They may be a Certified Financial Planner or Practitioner, a Certified Public Accountant (CPA), Personal Financial Specialist (PFS), or a Chartered Financial Consultant (ChFC), according to the CFP Board website.
   
   
6. Can you put it in writing? Ask each of the individuals you’re considering hiring to provide you with a written agreement that lists the services they’re able to provide and any associated costs, suggests the SEC website.
   
   
7. Are you a member of the Securities Investor Protection Corporation? If you plan to do business with a brokerage firm, be sure they are SIPC members, to provide you additional protection. If you've placed your cash or securities in the hands of a non-SIPC member, you may not be eligible for SIPC coverage if the firm goes out of business, according to the SEC website.