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How to Choose a Broker

There are more than a thousand brokerage firms available to sell you securities. Some of these firms have Hawaii offices, but many conduct business from outside the state by mail, over the telephone or by computer. No matter where they are located, Hawaii law requires all brokerage firms and their salespersons to be licensed by the Hawaii Business Registration Division of the Department of Commerce & Consumer Affairs. While licensing does not guarantee that a firm or its salesperson will perform according to your wishes, it does ensure that they have complied with the state’s minimum qualification standards.

A salesperson may be called a “broker,” “sales agent,” “account executive,” “financial consultant” or “registered representative.” Despite the difference in titles, the licensing requirements are the same.

Eight Steps to Take in Selecting a Broker

• Think through your financial objectives. Before discussing your financial goals with a broker, you need to fully evaluate your personal finances and decide how much you want to invest, how much return you need and how much risk you are willing to take to achieve your goals.
• Get references. Ask friends, rela-tives and co-workers for the names of brokers who served them well.
• Contact the National Association of Securities Dealers (NASD) hotline at (800) 289-9999 for more information about firms and their registered representatives.
• Your broker must be licensed to do business in Hawaii. Contact the Hawaii Securities Compliance Branch at 586-2722 for information about firms and their registered representatives. Licensing and disciplinary information also is available.
• Conduct interviews with at least two brokers. Talk with prospective brokers about what you want, and measure their levels of responsiveness to your needs. Ask questions about their experience and education. Be wary of a broker who attempts to sell you a product regardless of its appropriateness to your circumstances. Ask for customer references by name and telephone number. Contact each reference and ask about the broker’s performance and his or her responsiveness to their needs.
• Ask about fees and commissions. Your broker will likely receive a commission based on the size of your investment. Fully understand these costs before opening an account.
• 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.
• 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. The broker will make investment recommendations based on your investment objectives and your net worth, among other factors. He or she cannot make appropriate recommendations if you are not completely honest.
Public Information is Available

The NASD is the nation’s largest securities self-regulatory organization with 5,500 member firms and 600,000 registered representatives. Call the NASD’s toll-free hotline, (800) 289-9999 between 9 a.m. and 5 p.m. Eastern Standard Time for important facts about the firm or individual you plan to invest with:

• Final disciplinary actions and criminal convictions involving firms, brokers and individuals registered with the NASD
• Civil judgments involving securities matters
• Formal disciplinary proceedings that are pending before the Securities Exchange Commission (SEC), the NASD, other self-regulatory organizations and individual states
• Criminal indictments reported by the securities industry and the U.S. Department of Justice
• Pending or final NASD proceedings

Central Registration Depository

The CRD is a data bank containing information about the employment, qualifications and disciplinary history of the industry’s member broker/dealer firms and active registered representatives. When a firm or individual is sanctioned in Hawaii or by any other state or regulatory organization, that information is added to the CRD data bank.

Types of Brokers

Brokerage firms may be classified into three basic types: full service, discount and limited products.
A full-service brokerage firm can provide you with a complete package of investment services, including recommending securities, researching a particular issue or providing individualized service through a salesperson. The firm receives its payment in the form of a commission that is calculated according to the type of security and the amount you are investing. A full-service firm is generally best for those who are new to the market or who do not have the time or the desire to do their own investment research.

While a discount brokerage also can provide you with a wide range of services, its salespersons are not allowed to give investment advice, to make recommendations or to provide research materials. For these reasons, a discount firm can offer substantially lower commissions than full-service brokers. Experienced investors capable of doing their own investment research typically use a discount firm.

Limited products firms specialize in a limited number of securities products such as mutual funds or specific bonds. As an investor, you should shop for a brokerage firm just as you would for any other professional service. Brokerage firms come in all sizes, from “one-man” firms to international corporations. Similarly, the services offered by each firm and the commissions they charge vary significantly.

This information was provided by the state of Hawaii Department of Commerce & Consumer Affairs’ Securities Education Program, 335 Merchant Street in downtown Honolulu. Call 587-7400 or peruse the Web site www.state.hi.us/dcca/breg-seu.

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