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Breaking Down Brokers

CHICAGO — Lately, my e-mail from readers has been heavy with questions about how to find a good stockbroker. Frankly, I’m surprised at that. In my view, finding a good stockbroker—or any stockbroker—may not be the best course for the typical small investor.

For reasons that I’ve written about before, I don’t believe that most people should invest in individual stocks. Study after study has shown that most professional analysts who spend their careers trying to pick winning stocks seldom do any better than the market averages—and more often fall well short of the averages. Some studies have indicated that the typical stockbroker does no better than you or I could do when it comes to picking winners.

That’s the reason I believe that mutual funds, especially so-called index funds, are the best way for individuals to invest in the equity markets. Most people would do well to build their investments around a careful selection of stock and bond funds held for the long term.

Still, there are those hardy souls who like the challenge and excitement of dealing in individual stocks. These are the people who hope to find a stockbroker who can help them to pick winners.

Good luck. There are some, of course, but turning up one of these superstars willing to take on your account could be a tougher job than you might imagine.

If you’re seriously thinking about hiring a broker, I recommend that you first hire a certified financial planner who charges a flat or hourly rate to set up an overall financial plan. It should include insurance, estate planning, and other considerations important to you and your family.

If your planner provides you with a comprehensive outline, it will contain enough information to enable you to do most of your investing directly with the mutual fund companies. By doing that, you’ll get unbiased advice while you avoid the fees that make stockbrokers rich.

However, if you prefer to work with a full-service broker, there are a few things that you should keep in mind.

You could start by calling local offices of brokerages and asking them to hook you up with a good broker. I think you know how I feel about that approach.

A better approach would be for you to ask family and friends to refer you to a broker they like. But that may not be your best bet either. The people you’re asking to point you in the direction of a good broker probably aren’t any more qualified to rate a broker’s ability than you are.

Whatever means you choose to make first contact with a broker, it’s going to be up to you to decide whether he or she is right for you. Once you have a candidate or two, I suggest that you set up a telephone or in-person interview. Here are some of the questions you should ask:


This is perhaps the most important question you will ever ask a broker. Most important, you need to know whether the broker is paid on a commission-per-trade basis. If so, ask for a complete schedule of commissions. If the broker balks, you walk.

Some brokers now charge a flat annual fee instead of a per-trade fee. This usually runs between 1% and 3% of the value of the assets in your account. Need I tell you that a fee of 3% would take half of your profit on an account that managed to generate a 6% return?

Regardless of how your broker charges you for his service, it’s up to you to know every detail. It is, after all, your money.


Don’t be shy about asking this. A good broker will be proud to answer. You can check on this yourself by asking for the broker’s Central Registration Depository number. Then call the National Association of Securities Dealers at 800-289-9999, or check their website,


The hard truth is that many full-service brokerages expect their agents to push certain stocks. Even if the broker diligently studies the recommendations of his company’s analysts, you may not come out a winner. The report cards for analysts at some of the country’s largest brokerages have looked less than exemplary when exposed to the light of public scrutiny.

Recent changes in regulations may have cleaned up some of the abuses involving analyst recommendations, but that remains to be seen.

You should maintain good communication with your broker, especially when it comes to his reasons for buy/sell recommendations.


Never, under any circumstances, should you give your broker the authority to make trades on his/her own without your specific approval. If you read business news at all, you don’t need to be reminded of the disaster that awaits those who turn control of their trades over to a broker.


Some brokers concentrate on larger accounts, a half-million dollars and up. If you’re in the minor leagues in this department, it wouldn’t be a good idea to hook up with a big-league broker. When you need help, it might be tough to get his attention.

There are other issues, of course, not the least of which are personality considerations. If you entrust a goodly portion of your investment portfolio to one broker, you need to make sure that the chemistry is right between you. That’s where an in-person interview before you sign up can be a big help.

your money

Have a question or comment? E-mail our editor Dave Davis at [email protected] .