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Appendix A. Tips for Handling Your Broker, Financial Adviser, or Financial P...

Appendix A. Tips for Handling Your Broker, Financial Adviser, or Financial Planner

A survey of more than 200 affluent investors, defined as those with more than $500,000 of investable assets, showed that 26 percent were considering changing their investment adviser in the summer of 2002 because he or she was affiliated with an investment banking firm. The study, by consulting firm Spectrem Group, also showed that two thirds of those surveyed believe there is a conflict of interest when a company acts as both investment adviser and the underwriter of securities recommended by that adviser. Add those concerns to the knowledge that a broker’s main job is to get you to buy shares you don’t own and sell shares you already do so that he or she can generate commissions whatever the circumstances, and you have a basis for investor distrust. With that in mind, here are some tips to consider when getting advice.

  • Be clear about the differences between brokers and financial planners. Often, the major investment banks muddy the waters by calling their brokers “financial advisers.” The term investment adviser, by the way, is also very loose and could apply to someone from a mega-mutual fund group such as Fidelity or a one-man-and-a-dog advisory operation. In his book Take on the Street, former SEC Chairman Arthur Levitt recommends investors hire a financial planner who has certification either through the Financial Planning Association (www.fpanet.org/plannersearch) or the National Association of Personal Financial Advisors (www.napfa.org). Investors should pay for the services either on an hourly basis or by flat fee for a set number of visits.

  • If you have a financial adviser or broker who is affiliated with a brokerage or investment bank (either directly as an employee or through some other kind of business relationship), be careful of potential conflicts of interest. This particularly concerns any stocks or funds he or she might be recommending that have been underwritten or launched by the firm for which they work, or an affiliate. You do not want to buy just to help the broker meet a sales target for his or her firm’s own products. Always ask how a financial advisor is getting rewarded and what business connections he or she has.

  • When a broker or financial adviser doesn’t listen to your needs and is always after selling you the next big thing, ditch him or her pronto.

  • When an adviser seems to be more like a tarot card reader, watch out. If you really want someone to predict the future, you may be better off going to a carnival. An informed discussion about the way the economy and market might be heading is fine, but fortune telling is a no-no.

  • Avoid an adviser who pressures you to act quickly, telling you to grab an opportunity now. You should resist, and you should probably get yourself a new adviser. Remind yourself that if it’s a great company now, it should be as great in a week, in a month, or in five years. And leave the “low risk, high reward” proposals for dumber clients.

  • Make sure you know how an adviser is paid; usually it is on a commission basis. For example, if an adviser recommends a money manager, ask how much is in it for him or her. Unwillingness to discuss such topics openly is a bad sign.

  • Negotiate over commissions at every turn. There is almost always a range and opportunities for discount.

  • Avoid buying stocks with borrowed funds. Sometimes, brokers will suggest that you buy stocks on margin with money lent to you by the firm. This is fine if the stock climbs in price, but if it declines, you can not only lose your initial investment, but you have to pay back the borrowed money, too. In a rapidly declining market, a broker may sell the shares on your behalf without even consulting you—which means you lose control over the whole process.

  • Try to choose a broker or an adviser based on recommendations from friends or business associates whom you trust and who can give you a clear indication of what he or she has done for them.

  • Always check out a broker or an adviser’s background. You can glean a lot, including usually any disciplinary proceedings a broker has faced, by checking the National Association of Securities Dealers’ web site (www.nasdr.com) and asking for information about the person concerned. Another place you can check out a broker or an adviser and also make a complaint is through the state securities regulators. There is a link to many of these sites on www.sec.gov.

  • If your broker or adviser has a poor disciplinary record, you should ask for an explanation. If the answers are evasive or if you are not entirely satisfied, you should go elsewhere.

  • Examine any written statements very carefully for authenticity, and do some occasional unannounced checks in person at the brokerage office. Compare and contrast written statements with any web access you have to your accounts. I am not saying any of this is guaranteed to expose fraudulent brokers, but it can only help.

  • Never become a brokerage client or purchase any kind of securities investment from a cold call. Remember, there are always going to be fraudulent boiler room operations specializing in high-pressure tactics and seeking to prey on the unsuspecting.

  • Oh, and if your broker tries to tell you that Wall Street really has been portrayed unfairly in recent years and is full of the scrupulously honest, that may be reason enough to drop him or her. You want somebody who knows it is a game and helps you to play it.



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