5 Questions Every Investor Should Ask Their Broker

1. 5 Questions Every Investor Should Ask Their Broker In many cases, the term "broker" and "advisor" are used to describe the same type of financial intermediary. For the purposes of this article, I will define a "broker" as someone who receives a commission from the sale of financial products such as stocks, bonds, mutual funds, etc. I will define an "advisor" a a person who receives a fee from the client in exchange for their services which may include investment management. So, let's get started: 1) How much will you make if I buy this investment? It is very important for you to stick with this most basic question until it is answered in full. Some brokers may try to avoid a direct answer buy providing a response such as "I will receive a commission/fee from the investment company." Unfortunately, that does not answer the question. The real answer should come in two forms: a percentage of the investment amount (e.g. 5%) and an actual dollar amount (e.g. $4,200). Furthermore, if multiple investments are being proposed, insist on receiving a total dollar amount of commission being paid. You should also be able to verify the broker's response by having him or her show you the details in the investment's prospectus. Keep track of this total for every transaction throughout the year to evaluate the value received from the broker's service. 2) How does this investment fit into my overall strategy and plan? To answer this question, the broker will have needed to develop a clear and concise investment plan before proposing the investments. For example, if you are investing for income and the broker wants you to buy a small cap stock mutual fund, there needs to be a reason that they are recommending stocks instead of bonds or other income producing investments. There could be a very good reason for the stock recommendation-- they just need to be able to explain it to you in clear terms. The same is true for the level of risk for any proposed investment. Be sure that you understand what the risks are before you buy Broker Advisor. Once the investment is made, it could be costly to get out of! If you don't fully understand the reasons given by the broker, do not be afraid to ask for clarification. This is your money and you need to know what is happening with it! If you don't understand or the broker can't explain it, steer clear and keep your money safe. 3) Does your company have any affiliation with the investment being offered? This question has carried even more importance lately as we have learned about securities being sold to investors as the brokerage firm was betting against them. You will need to use your own judgement about how any relationship that may exist affects the appropriateness of the investment. The idea here is to discover whether or not any conflict of interest may exist. If you discover that a relationship does exist between the broker and the investment being sold, do not hesitate to explore further. It may have no bearing on the overall decision but you definitely will want to be aware of any potential conflicts of interest when your money is involved.

2. 4) What will this cost me? This question is somewhat related to the first one regarding commissions but goes deeper than that. This is especially true in the case of mutual funds and alternative investments that may have annual expense ratios, account maintenance fees, or other various charges. These fees may seem minimal at first glance but when added up may have a significant impact on the investment's performance. This is also a great question for a fee-only advisor. Some advisors charge a flat annual fee while others may charge a percentage of assets they manage (e.g. 1.25%). Still others may charge both depending on the services they offer. Advisors are required to provide a form called the ADV Part II and Schedule F to any potential clients. This form describes in more detail what services are offered and how the advisor is paid. Be sure you get these forms as well as their disclosure brochure so that you can get an accurate picture of what you will pay for their services. 5) How long do you expect to hold the investments? Another way to ask this would be "What is the exit strategy?" Knowing the holding period will help you determine your total projected cost for the investment. Exit strategy is very important for liquidity purposes as well. For example, if you think you will need some money within the next 3 years but the investment has a 5 year holding period, you may want to consider an alternative. These issues routinely come up when annuities or private placements are involved. This would be a good time to ask about any costs associated with getting out of the investment as well. Are there transaction fees that you have to pay to sell? Is there a deferred sales charge? What about annuity surrender charges? Be sure you understand when and under what conditions the investment will be liquidated. There are plenty of other questions to ask but these five will get you started. The goal is for you to understand the motives, goals, and investment plan when someone is trying to convince you to invest your hard earned dollars. If, at any point during the conversation you do not feel comfortable moving forward, simply excuse yourself and head for the door! A moment of slight embarrassment is well worth the thousands of dollars it could save you.