Continuing this series of articles on how to choose a stockbroker, the single biggest mistake made by far too many Americans is that they allow the stockbroker to choose them, as opposed to the individual choosing the stockbroker. Those who do business with a particular broker based upon an original cold-call from the broker are apt to have many more problems than the person who interviews, researches, asks questions, and ensures a good match. The second biggest mistake is for people to assume that since they don’t know much about investments, they don’t have the knowledge to choose a stockbroker. Therefore, they stumble into a broker relationship with no forethought. This is a grave error, considering that most people entrust to stockbrokers money they cannot afford to lose.

Referrals

Referrals are often thought of as one of the best ways to choose anything. However, some words of caution are in order. Be wary of the broker who cold-calls you and says that he was referred to you. Unless the broker can give you the name of the referral and you can verify it, you can assume that the statement is false.

Asking a friend for a stockbroker referral is considerably more difficult than asking a friend for a dentist referral. There is not much that is considered confidential about a dental relationship, however, the client-broker relationship concerns issues considered very private by most. People may be hesitant to discuss their financial goings-on. Another problem with referrals is that the person making the referral may have a different set of financial goals than you do - who may be a good stockbroker for him or her may be totally inappropriate for you. Therefore, you must pre-screen your referral source. Ask your source questions like how long they have used the broker, how often they communicate, if they feel their objectives are being met, if they feel pressured or uncomfortable, what kind of services they get, if their broker is accessible, and if they get prompt explanations to their questions. Your source’s knowledge of their own investments, accounts and stockbrokers in general will weigh heavily on how much the source’s advice is worth. I’ve had many a client who referred his friends to a broker, only years later to find that they were all defrauded. Don’t take referrals lightly.

Specialties

A broker friend of mine tells the story of a rookie broker seated next to him going through the following routine. All day long, the broker would call people and his first question would be, "What investments are you interested in?" No matter what the response, the broker would reply, "That’s what I specialize in!" By the end of the day, this broker had professed his "specialty" in every investment under the sun. Tip: Ask the broker you are interviewing what he specializes in before you tell him what you are interested in. Unless the broker proves his specialty, consider that it may be mere hype.

Same Wave Length

People say the divorce rate is so high because people marry who do not have a lot in common The real reason is that people are not on the same wave length. Being on the same wave length is as important with your stockbroker as it is with your spouse. It is critical that you and your broker have a meeting of the minds and that your communication is meaningful. This requires time delving into the broker’s work history and personal life. If you are 55, on fixed income and have 4 kids, do you think a broker who’s 28, single and living in the fast lane going to be able to relate to your concerns?

When you are first interviewing a potential broker, I recommend having another person with you, like a family member or close friend. Have the other person write down everything the broker is saying, leaving you to concentrate only on the conversation level. Is the broker talking so fast you can hardly understand him? Is he using words and phrases that you are unfamiliar with? Is he selling? This is somewhat to be expected, but are his words filled with hype and promises that are too self serving? Is he spending more time talking than asking questions and listening? The words on paper may be impressive, but when you evaluate how the broker communicated and interacted with you, you may feel quite the opposite. If you are not comfortable, then your feelings are probably correct and there is no need to waste time with a second meeting. Check this broker off your list.

The Second Meeting

It is a mistake to pick a stockbroker to whom you will be entrusting a major portion of your assets after only one meeting. If you are going to use the broker for limited means or a one time purchase, one meeting at the outset might be fine. Otherwise, you need a second meeting. The first meeting was likely centered on the broker persuading you to hire him and the broker asking you questions. In the second meeting, the broker should give you his outline and recommendations of how to meet your goals on a near term and long term basis - a plan to guide your investments for years to come.

Consider the following in the second meeting. Do the broker’s suggestions seem to match up with what your earlier stated investment objectives were? Does the broker formulate a game plan that is thorough and comprehensive on both a short term and long term basis (5 - 10 years)? Does the broker communicate his plan in a manner that is easy for you to understand? Is it apparent that the broker is paying particular attention to your special situation - has he incorporated what you told him about your tax bracket, your retirement plans, or your upcoming financial needs? Does the broker explain in detail the risks of various strategies and of particular investments (stay away from any broker that does not discuss risks)? Does the broker discuss conflicts of interest of various investments (a conflict can be anything from a product that pays a higher commission or an incentive to sell a particular product). Again, is the broker tending to be more of a salesman (which he is) or more of a long term financial consultant? Does he seem to be in a rush to implement the plan, that is, a quick closer (usually not a good sign)?

Generally, the second meeting should not focus as much on specific investments but, rather, on the game plan and overall strategies. The specific investments and the details relating to those investments should be what the rest of your relationship is based upon.

Senior Vice President, Portfolio Management

Pretty impressive title, huh? The sad reality is that the person holding this title could be 23 years old with a degree is in pottery that he received two weeks earlier. He probably knows as much about portfolio management as you know about nuclear physics. There is an old saying in the banking industry, "If you can’t pay them more money, give them a more impressive title." In the brokerage industry, they do both. Do not be impressed by titles. They are meaningless. Repeat meaningless. That goes for the person who has "Manager" on his card; sometimes the manager is the guy who needed to supplement his income, because he couldn’t make enough money as a stockbroker.

Preparation of this article was assisted by Douglas J. Schulz, a former stockbroker and registered investment advisor in Colorado Springs.