The relative ubiquity of the Internet and the availability of extremely affordable online stock trading companies (such as Charles Schwab, Scottrade and Zecco) has upped the ante for what you should be able to expect from a stock broker. According to investment expert Jason Kelly, no one who knows how to pick stocks should waste his time selecting a broker, because on average, investment brokers fare no better than index funds. In other words, you could either manage your money by yourself and risk losing it or put it in a virtually guaranteed index fund to get functionally the same returns as if you used a broker. If you insist on using an investment broker, be sure that you’re getting real value.
Select the type of services you want your investment broker to provide. If you want someone to provide you with stock recommendations and control your investment portfolio for you, then that’s one type of broker you will need to look for. If you just want a place to trade stocks, then a cheaper online service is more suitable. Do you feel more comfortable working with an investment broker that’s with a fairly small firm, or would you prefer a major institutional investor? If you don’t have peace of mind once you hire a broker, then you are with the wrong broker.
Review the background of any potential broker you are considering. Whether you contact a major firm like JP Morgan, Morgan Stanley or Goldman Sachs or you want to work with a smaller financial planning firm, it is essential that you know the background of the broker with which you hope to consult. First, you definitely want to make sure that your broker is licensed. To check, visit the website of the Financial Industry Regulatory Authority (FINRA), and type the first and last name of your prospective broker into their investment broker research database.
Some additional information worth researching includes whether the broker has ever had a run-in with a regulatory authority, whether the broker gets paid by the hour and/or by commission, and whether any of your capital is insured in case the brokerage firm itself goes out of business or faces tough losses in other areas.
Choose the broker with the best background and most favorable compensation scheme. Ideally, you want a broker that is licensed, experienced, has never had a run-in with a federal agency over a trade issue, went to a great school, is affordable, and will be paid based on a commission that is totally dependent upon the success of your portfolio. In reality, however, the better a broker is, the more justifiably he or she can demand for consulting with you. Brokers that work on commission when they first start out are frequently inexperienced, but hungry to do well; those that become experienced run the risk of becoming a bit lazier with their stock picks since their salaries are not necessarily dependent on the growth of the portfolios they manage. In short, you will not find the perfect broker, but you can get close if you are careful and cautious in your selection process.