Selecting a Stockbroker—Part III

Law IAC
Hector Rojas, Spring 2017 Student Intern

Thus far in our discussion of selecting a financial broker, we have discussed what a financial broker is, what their role is, who governs their conduct, and the standard of care brokers must follow. In part three of this series, we will tie together all of these concepts and discuss why this matters to the investor. By the end of part three, you will understand the importance of properly researching and selecting your broker and how this simple, but important step, can help avoid broker misconduct and investor fraud.

Why does this matter?

Stockbrokers earn a commissions from the sales they execute on behalf of their clients. This fact, however, creates the risk for conflict between the broker’s interest and the interest of the client. For example, sometimes brokers recommend a product that is unsuitable for the client (according to the standard and factors listed in part II), that generates higher commission rates for the broker.  Most investors don’t ask what they are being charged, and without that information they cannot be fully informed.

Why should I research my broker?

Imagine you are a parent in need of a nanny. Now imagine that because you were in a hurry for someone to properly supervise your children you hired an eighteen-year-old kid you interviewed only once. Unbeknownst to you, however, it turns out that the nanny you just hired has a warrant out for their arrest for child endangerment. Now, this example is a little extreme, but you get the point. You wouldn’t entrust your children to a stranger you know nothing about, so why would you entrust your hard earned money to the same? If you could take actions to minimize the potential for broker misconduct and investor fraud, why not do it?

Think about it, your broker is in charge of managing your money, staying up to date with the latest securities laws, market research, and financial news in order to best serve you. We are talking about serious business here. Would you want a broker that has a bad track record and only recommends their client high-risk products that ensures him/her high commission rates? I don’t think so. Properly vetting your broker may save you.

Moving forward…

Now that you understand the significance of properly researching your broker and how they can directly impact the success or failure or your investment, in part four of this series, we will discuss some of the resources available for investors to learn more about their broker or potential broker. Things are heating up, stay tuned.