If you’re an individual investor or even a company looking to hire a broker/financial advisor it’s important to do more than just talk to the person. An accomplished broker can make even the worst news or information look good. It’s just a skill you have to develop in order to survive. A skilled broker can make you deliriously happy that the stock you bought on his recommendation just dropped 25%. It’s just something you have to do if you want to keep your clients in a bad market.
Checking your Broker’s U4So, before you interview a prospective broker check his U4 or Uniform Application for Securities Industry Registration or Transfer. You can check on your broker here: http://www.finra.org/brokercheck. All you have to do is do a search on his name and the company he works for and you will get detailed information about him/her. Some of the things you can find are the following: Full Name His Place of Business Licenses States Registered in Past Employment Record Criminal Background if Any Bankruptcy Judgment or Liens Customer Complaint/Arbitration/Civil Litigation Regulatory Action This is some of the more important information that can be found on your brokers U4. After you look at this, is he/she still looks good then it’s time for a face to face. But before that, there are some things you need to know.
The Question of Arbitration The word arbitration to a broker is like the F-Bomb to your parents. It’s a scary word nobody wants to hear or talk about. Just because a broker has been taken to arbitration it does not mean he/she is a bad, or rogue broker as the term used to go. The reality of arbitration is this. In a down market, a really bad one like March of 2000 everybody is hurting and looking for ways to recoup losses, and for some people that means taking their broker to arbitration. It’s common knowledge among most seasoned investors that by just taking your broker to an arbitration hearing, the panel is likely to award you some of your losses. They want to protect and keep investors happy and investing so they tend to favor the investor even when there is not a shred of evidence against the broker. I know this first hand.
When I was a broker I had to go to an arbitration against a fellow broker. I was the expert witness. The client had lost about $20,000 dollars using an investment strategy called “short against the box” after being told repeatedly that it was too risky and he was misunderstanding how it worked and was doing it wrong. Whole conversations were recorded and the arbitration panel decided against the client saying the broker did no wrong and had been correct in his advice. The panel was quite stern with him and had him in tears. Then, to the astonishment of us all, they awarded him $10,000 anyway. That made him pretty happy but it devastated the broker. Because of the size of the award, it went on his permanent record and his career ran into a dead end. Sure he kept his license, but as far as any advancement in his chosen career, not a chance.
Track Record Once a broker is taken to arbitration, even if found innocent, the odds are stacked against him if he ever goes again. The arbitration panel is much more likely to side against the broker if he has been there before, regardless of the outcome. Unscrupulous clients looking for money used to check brokers U4’s looking for active, licensed brokers with dings on their record. They would find a broker who had been to arbitration 2-3 times and sign up with him/her as their financial advisor knowing full well that if they lost money they had a great chance of getting it back by taking that broker to arbitration once again. It’s a risky business being a broker, especially in a down market.
The Good News Broker have to say, the highlight of the beginning of my career as a broker came on day after I recommended 2 tech stocks to a client before going on vacation. My client was looking for a fast trade and spent a little over $150,000 between the two stock picks. The plan was to call in to the firm and sell them if they went up two points or to sell them if they went down two points to limit potential losses. When I came back from my dive vacation he still owned the stocks. To make matters worse, the night before I came back to work I dreamed one of them had pre-released earning before the open and it dropped from $25 a share to $4 a share. When I got to work that morning my dream came true. The other stock pick lost ten points and my client ended up losing $100,000 in a single day.
I called him and held the phone well away from my ear as he swore for about 5 minutes. When he was finished we came up with a plan to make back the money, and we did. He became my most loyal client. So, the point of my very true story here is, you need to know if you are speaking to a good news broker. A broker who will only call you when your stocks are going up and never call you when they are going down. Not everyone can make that call. It was probably the hardest call I have ever made in my life at that point. Ask your prospective broker how he would handle a particular situation and then just trust your gut feeling about it. The only way you will really know if he will make the call is if it happens.
Other Questions Of course those are just a few things to take into consideration when choosing a broker. You will no doubt have others. You may want to ask what his investment philosophy is, or how he assesses risk. Ask him about investment strategies. You should know if he is just a stock picker or if he is a financial planner and has an investment strategy. Tell him a little about your life and your financial goals and how he would get you there. These are all important things that should follow checking his U4. You will be glad you did.