How to Find an Investment Broker Who Won’t Offend You

Despite the popularity of cheaper online brokers such as Etrade and TD Ameritrade, many investors still use traditional brokers from which you still buy and sell by placing orders with a live person. The bad news is that many brokers are under pressure from their bosses to sell you items that may not be in your best interests. Here’s how to protect yourself.

People love dealing with live brokers because they think these brokers know more about the market and can steer them away from bad investments and invest in better ones that they cannot find. Most large brokerage firms have full-time staff dedicated to researching companies, funds, and alternative investments. They pass this research on to your broker, which gives you the confidence that you are dealing with someone who might steal you away from a bad investment, and those that those who take advantage of discounts do not know about.

At least that’s a theory. However, this is not always the case, mainly due to conflicts of interest. The management of a large broker often decides to promote a particular investment because they receive a higher commission for it. They then get brokers to direct their clients to those investments. Here is one of many such cases .

If you have suffered losses due to being directed to a bad investment, you have no way out. You cannot sue a broker because the broker is not required to act as a trustee – someone who is legally forced to put your interests ahead of his own. For example, if you find that the owner of your property or your doctor has done something for himself at your expense, you can sue them because they violated their fiduciary responsibility. Brokers are not bound by this.

To protect the investor from the street, the government is considering legislation requiring brokers to be fiduciaries. If accepted, it would allow clients to sue brokers if they bought an investment that benefited the broker but was not disclosed. Whether the law will be adopted given the lobbying influence of the financial services industry is an open question.

In the meantime, if you are using the services of a traditional broker, you need to do your due diligence to make sure you are getting someone reliable. Here are a few questions, some inspired by this Associated Press article and some from my own experience, that you should ask before acting on their advice:

  1. Find out what incentive the broker gets on top of the commission you pay. If you pay nothing, someone else is paying. Knowing this can help you better understand whether the advice you are receiving is “sponsored” or unbiased. Look for planners who you pay directly, not commission planners who are paid for the products they sell.
  2. Find out if your broker is acting as your proxy. Some are, but most are not. If you have, you can expect them to be a lot more careful with their advice because that means you can sue them if a conflict of interest arises and that conflict resulted in a loss of money. (It’s worth asking, but don’t hold your breath. The vast majority of brokers understandably avoid becoming fiduciaries.)
  3. Check their credentials. The CFP (Certified Financial Planner) is generally considered a high standard of objectivity. If your broker has other letters, it’s worth checking what they mean.
  4. Verify your identity. If you’ve ever listened to CNBC’s American Greed, you’ll notice how many people did business with famous criminals simply because this guy looked honest. The Financial Industry Regulatory Authority (FINRA) maintains a database of all brokers, including any legal issues. Here is a link to a search page that should identify the most egregious bad apples. But you can also just google the name of the broker and do some digging.
  5. Do your homework on the investment they offer. When a broker offers an investment you’ve never heard of, take a few minutes to go to Yahoo Finance or Google Finance to check it out. These sites are free and contain a ton of information.
  6. Ultimately, it’s best to ditch personal brokers. They need to get paid, and the only source of that money is you, the customer, whether it’s a direct commission or a pullback on the investment they’re selling. Generally, using a discount broker to buy inexpensive index funds is the cheapest and safest way.

It’s nice to do business with someone with whom you have a good relationship. Better yet, do business with someone you’ve verified. But it’s best when you don’t have to pay for something you don’t need anymore.


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