Investing & Finance
Investigate before you invest
Eight steps you should take before you select a broker:
- Make a plan. Think through your financial objectives. Before discussing your financial goals with a broker, fully evaluate your personal finances and decide how much you want to invest, how much return you require, and how much risk you are willing to take to achieve your goals.
- Get broker references. Ask friends, relatives, and coworkers for the names of brokers who served them well for a year or more.
- With your plan in hand, meet with each broker who sounds right for you. The interview should be free if the broker is paid on commission. If the broker provides a fee-only service, the meeting might be free, or the broker should tell you the fee before you meet. Talk with each broker about what you want and assess their responsiveness to your requirements. Ask about their experience and education. Be wary of brokers who attempt to sell you a product, regardless of its appropriateness — they should not attempt to sell you a product during this initial interview. Ask for client references by name and telephone number.
- Contact each client reference and ask about the broker's performance and responsiveness and how long they have been a client..
- Ask brokers about fees and commissions, which should be clearly stated on their website or literature. Take notes. Most brokers or investment salespeople receive a commission based on the size of your investment. Investment adviser representatives receive a fee based on a percentage of the money under their management.
- Decide whether you'll use a full-service or discount brokerage. Determine how much service you want from your brokerage firm. A full-service firm will offer investment advice, make recommendations, and provide research support. A discount broker does not make recommendations about buying or selling a specific security.
- State your net worth honestly. Be realistic in stating your net worth and the cash you have available to invest. Do not exaggerate your net worth to impress the broker or qualify for an investment limited to “accredited investors.” Brokers are required to make investment recommendations based on your investment objectives and your net worth, among other factors. They cannot make appropriate recommendations if you are not completely honest.
- Do your homework. If you like one of the brokers you've met, call the Financial Industry Regulatory Authority, Inc. (FINRA) at 1-800-289-9999, to get the broker's Central Registration Depository (CRD) number. This is the broker's license number and is linked to their employment and disciplinary history. You can then look up the broker on the Broker Check database at https://brokercheck.finra.org.
Ask for the following information:
Final disciplinary actions and criminal convictions involving firms, brokers, and individuals registered with the FINRA:
- civil judgments involving securities matters
- formal disciplinary proceedings pending before the Securities Exchange Commission (SEC), FINRA, other self-regulatory organizations, and states
- criminal indictments reported by the securities industry and the U.S. Department of Justice
- Pending or final FINRA proceedings
Central Registration Depository (CRD)
The CRD is a data bank containing information about the employment, qualifications, and disciplinary history of the industry's 5,500 member broker-dealer firms, and 600,000 active salespersons (also known as registered representatives). When a firm or individual is sanctioned by any state or regulatory organization, that information is added to the CRD data bank.
Next, make sure the salesperson is registered to sell securities in New York. You can find this information online at FINRA’s Broker Check, or make request the salesperson’s CRD “snapshot” from the Investor Protection Bureau of the Office of the New York State Attorney General under the New York Freedom of Information Law (FOIL), using the online FOIL form.
If the person is not registered, ask them about their status and verify the information.
If you are interviewing an investment adviser, ask about their:
- experience and background
- business philosophy
Everyone is vulnerable to investment fraud. Before you invest in stocks, bonds, or any other kind of investment, take the time to educate yourself about how to recognize and avoid scams. The resources listed below are a great way to get started.