What Information Should I Get From My Broker Before Making An Investment?

Financial advisors and stockbrokers are required to propose investments that are suitable for their customers. The concept of suitability requires an assessment of a number of factors, including the client’s age, income, net worth, tax status, investment objectives, risk profile, liquidity needs and time horizon.

Instead of using these factors to determine suitable recommendations, stockbrokers sometimes recommend investments that pay the highest commissions. Investors should be skeptical of claims made about investments, and they should be prepared to conduct their own research prior to investing in any company or financial product.

The U.S. Securities and Exchange Commission advises investors to ask five key questions before making an investment.

  • Is the seller licensed? Investors should carefully check the background of anyone promoting an investment opportunity. FINRA’s BrokerCheck database is a good place to start. Investors can research the background of investment advisors at the SEC’s Investment Adviser Public Disclosure website.
  • Is the investment registered? All securities must be registered with the SEC (unless exempt). Company information provided at registration time allows investors to learn about the products and services offered by the company, along with its financial health.
  • What are the risks and potential rewards of the investment? Generally speaking, greater risk attracts great reward. Greater risk also exposes the investor to the possibility of greater investments losses. Your stockbroker should be prepared to explain the risks and rewards of all proposed investments. One of the key components of suitability is the investor’s tolerance for risk.
  • Do you understand the investment? A responsible investor will have an exhaustive knowledge of how the company makes money. What do they sell? Where do they operate? Are their products best? Are they industry leaders? What do sales look like — recently and over the past period of years? Never invest in a company or business venture if you do not have answers to these questions. Here again, if a stockbroker is doing their job well, you should have access to a wealth of financial information about the company: price/earnings ratios, beta (stock volatility), market capitalization, dividends and industry trends. A prudent investor will ask the stockbroker how they will be compensated for their role in the investment.
  • Where can you turn for help? Learn how to use federal and state regulators’ websites, and do not hesitate to contact the SEC, FINRA or your state securities regulator if you require further information.

Stockbrokers should take the time to educate their customers on the particulars of their investment accounts. For example,

  • Who controls decision-making for purchases and sales?
  • How often are account statements provided?
  • Are investments registered in the name of the broker or the investor?
  • What are the fees and commissions relating to this account?
  • What services are provided by the broker?
  • Who should the investor contact if they have questions regarding the account?

An investment should not be made unless the investor thoroughly understands the risks and rewards of a proposed investment, and how that investment advances their overall investment strategy. Stockbrokers have a large educational role to play, but they should by no means be the only source of information about a proposed investment.

Attorney Matthew Wolper

Attorney Matthew WolperMatt Wolper is a trial lawyer who focuses exclusively on securities litigation and arbitration. Mr. Wolper has handled hundreds of securities matters nationwide before the Financial Industry Regulatory Authority (FINRA), American Arbitration Association (“AAA”), JAMS, and in state and federal court. Mr. Wolper has handled and tried cases involving complex financial products and strategies ranging from traditional stocks and bonds to options, margin and other securities-based lending products, closed/open-end mutual funds, structured products, hedge funds, and penny stocks. [Attorney Bio]