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Choosing an Investment Professional

Investing is risky business, as you know. While you can't control market forces, you can control whom you trust to provide you with securities analysis, execute your trading decisions, give you investment advice, or manage your investment account.

Always check the background, reputation, credibility, and track record of a firm or an individual financial professional before you deal with it or him.

Whom you trust is very important in investing. Obviously, dealing with an untrustworthy and/or incompetent financial professional is dangerous to your financial well being.

How do you determine if a broker, investment adviser or a financial services firm can give you good service? How do you ascertain that a financial professional will not deliberately lead you astray for self-gain? Read on for some tips on choosing an investment professional.

Do the following before hiring a financial professional:

1. Check out the individual or the firm's registration status

Broker or brokerage firm: The license to operate as a broker or to provide brokerage services is the first thing you should check about a prospective broker or brokerage firm. Make sure that your broker or brokerage firm has the appropriate and a current license.

Investment adviser: Any number of investment professionals can give you trading advice. However, only those with investment adviser status may receive compensation for dispensing such advice.

Make sure that the person you are paying to give you investment advice is registered as an investment adviser. Sometimes, an investment adviser with a large holding that spans many states may hire representatives to manage individual accounts. If you are dealing with an investment adviser's representative, make sure this representative is licensed by or registered you're your state's securities regulator.

Investment advisers managing assets amounting to less than $25 million need to be registered with their state's securities regulator. Investment advisers managing assets amounting to more than $25 million need to be registered with the SEC.

2. Find out how many years your investment professional or firm has been in business

How long has the firm or the individual financial professional been in business? Generally speaking, you want a financial professional or a firm that has been in business for a considerable amount of time.

It makes sense to deal with a seasoned broker or investment adviser for several reasons. The following are a few of them:

  • A financial professional or a firm that has been in the securities business for a while should be more experienced than one who has just started. An experienced financial professional or firm is a valuable resource for investors (especially for beginners). Experience is even more important for investment advisers.
  • A financial professional or firm that has been around for a long time has built up its reputation. You can expect this individual or firm to be more conscientious about doing things the right way to protect his/its brand or image.
  • A financial professional or a firm that has been in business for many years will have a track record. You will have historical information to use on deciding his/its merit. This brings us to our next point.

3. Check out your financial professional's credentials

Certifications or credentials provided by organizations are not required by law, although most stated do require their investment professionals to pass certain proficiency exams.

If your investment professional claims to be certified or credentialed, find out what credentials he holds and how he got them. Next, check with the body or board that award such credentials to confirm whether the financial professional does have the credential he claims to hold. Check, too, if the financial professional is in good standing with accreditation bodies.

4. Check out your financial professional's or firm's expertise

If you are interested in a particular investment product (say, equities), you want a financial professional or a financial services firm that specializes in this type of securities. Different types of securities come with different risk factors, risk levels and profit potentials.

Think of it this way. A general practitioner probably knows enough to perform a surgery. Nevertheless, when its time to go under the knife, you'd be more at ease if a surgeon, rather than a general practitioner, does it.

5. Research your financial professional's or firm's disciplinary history

Find out if your financial professional or financial services firm has been cited in complaints or has received disciplinary action in the past. Find out everything you can about such complaints or disciplinary actions - what the resolutions were and how much the fines were (if any).

Why is this important? You know the saying. There's no smoke without fire.

If a financial professional or firm has been the subject of many complaints, there may be something wrong with the way he/it does things. While this is not conclusive evidence of wrongdoing, this is like an "investors beware" sign. It warns you to be cautious, to take things slow and to investigate a financial professional or firm more fully before signing a contract of service.

Likewise, you should be cautious if a financial professional or firm has been fined extensively and in numerous occasions. Fines or punitive monetary damages weaken a person or a company's financial position. If, later on, you file suit or an arbitration claim against this person or firm, you might find it impossible to collect damages. Your claim might just be the last straw and the firm or the financial professional could go bankrupt. Most unpaid securities claims (whether resolved through litigation or arbitration) involve bankrupt entities.

6. Research potential sources of conflict

What are your financial professional's ownership interests, sources of income, affiliations, and other potential sources of bias? Does your prospective firm have investment banking relations with the issuers of the products it deals in?

7. Ask your financial professional a lot of questions

You should never hesitate asking your broker about anything that is even remotely relevant to securities trading. This is especially important if you are an unseasoned investor and naturally doesn't know much about how the securities industry works. Even if you've been investing most of your life, if a question occurs to you, ask your broker about it.

A good financial professional will accommodate and answer all of your questions, even the dumbest sounding ones. He'd rather be bothered now, before you commit yourself, than face your complaints later on. If a prospective financial professional brushes you off when you begin asking questions, cross him off your list.

Ask your financial professional questions about the following (among other things):

  • his qualifications, certifications, and specialization
  • the amount of assets he handles
  • his disciplinary history
  • the products he deals in
  • the exchange/exchanges and trading platform/platforms he uses
  • rates and compensation
  • typical trading procedures and timeframes
  • potential conflicts of interest (e.g. does he earn commissions from certain products and which are these)
  • standard dispute resolution procedures
  • his typical investment strategy (e.g. what are his benchmarks for buying and selling decisions)
  • clients you may contact for reference purposes

Remember that the above list is not exhaustive. Moreover, take note of all the answers you're given in your Q&A. This will come in handy if something you were positively assured about in an initial meeting is missing from the contract you're being asked to sign. This should also work as a great reference if you forget something later on. This may also help in case of a dispute.

8. Ask your financial professional to explain how he gets paid

Technically, this is part of the above tip about asking your financial professional a lot of questions. This particular entry requires more elaboration, however.

When asking a financial professional about his rates and compensation, you should ask him to explain how he gets paid. Specific questions you may ask include:

  • Will you bill me hourly or do you charge a monthly fee? In case of the latter, will you charge a flat monthly fee or will your monthly fee be a fixed percentage of my assets for that month?
  • Do I pay you a service charge for individual trades executed on my account? If so, how is this service charge computed?
  • Will you earn a commission from the sales you make on my behalf?
  • Will you earn a commission from the seller for buys you execute on my behalf?

9. Test drive your financial professional

In your pre-signing Q&A session, test the measure of your financial professional by giving him hypothetical situations. Say you have A amount of capital and you want to invest it in Z type of investment product. Explain your investment preferences (especially your investment goals and your risk tolerance). Next, ask him what you should do.

A broker, at the very least, should give you a variety of options and situate each of your choices in the context of your circumstances and investment preferences. An investment adviser may do the same, but should also recommend a specific course of action.

Important reminders

  • Before subscribing to an investment newsletter service (especially one that offers auto-trading services), make sure that the publisher of the investment newsletter is registered as an investment adviser.
  • Brokers (and brokerage firms) are usually investment advisers, too. If you are giving your broker discretionary authority over your account, make sure that he is a registered investment adviser.
  • As a general rule, you should not give anyone discretionary power over your investment account. If (for the sake of efficiency) you decide to do so, make sure to entrust such control only to a registered investment adviser.
  • Make sure you can get along well with your financial professional. Don't hire someone you can't stand.
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