Four Tips for Finding Out if Your Broker is Trustworthy

Jarie Bolander
Mar 13, 2017 · 4 min read

When dealing with brokers, trust is crucial. Since you are relying on them to sell you securities that will help you reach your financial goals for the future, you need to be 100% sure they are legitimate, trustworthy, and above board.

Nobody wants to fall into the hands of a Bernie Madoff or Jordan Belfort. Luckily, with a little research, that fate can be avoided.

How do you find out, though? In this quick guide, we will share our best tips for finding out if a broker can be trusted. Everything you want to know is out there. It’s just a matter of knowing where to look in order to find it.

Is Your Broker Trustworthy? How to Find Out

Before we begin, let’s say something up front — legitimate, licensed brokers will make it easy for you to verify them and set your mind at ease. If you are finding it difficult to get straight answers from your broker, or can’t find any independent sources of information, that is a huge red flag. As the old saying goes if in doubt, leave it out.

That said, look at the following to verify your broker’s legitimacy:

#1 — Check Out Independent Review Sites

Review sites like Trustpilot are a goldmine of information about companies of all kinds, brokerages included.

Due to the fact that the reviews left on these sites are generated by customers only, you can be pretty sure you are going to get an accurate overall picture about the broker you are dealing with. The rating a brokerage has will be the average of all of the reviews past/current customers have left, and this should help you gauge how satisfied they are/were.

Look out for obvious warning signs. Lots of negative reviews or comments, any patterns in the comments such as complaints about hidden fees, and low ratings all signal trouble. Even if the broker is licensed, customers may be having negative experiences, in which case you want to avoid them.

The reserve is also true. If there are lots of positive comments and only a few negatives, the broker in question is probably a safe bet. There will always be one or two nutbags who rant online no matter how great a service is. If the majority of the reviews are positive, you can filter out the negatives.

#2 — Go Directly to the SEC

All licensed, legitimate brokers are required by law to register with the SEC, or FSA in the UK. In the USA there is a computerized database called the Central Registration Depository (CRD) which keeps records on broker registrations, filings, and any disciplinary action which has been taken against them. You can even find out about an individual broker’s educational background.

This is a treasure trove of information. It would be impossible to manipulate this database, and it is guaranteed to be neutral, allowing you to build a clear picture of a broker/brokerages past.

For individual investment advisers, you can check out the Investment Adviser Public Disclosure (IAPD) website. This is the equivalent of the CRD for individual investment advisers. It’s a wealth of useful information.

#3 — Take the Word of People You Trust

Do you have family or friends who use a broker or investment adviser? It’s hard to beat the direct word of someone you know personally and trust.

Since they have no vested interest in misleading you, and in fact have a strong incentive not to do so since their own reputation would take a hit, a direct referral from a friend or family member is invaluable.

Even if you don’t want to use the exact broker or firm they use, if they are knowledgeable about investment in general, they may be able to point you in the right direction or warn you off when you are headed down the wrong road.

#4 — Talk Directly to the Broker

There is a great deal you can learn about your broker from having a direct, face to face conversation them. This is your chance to ask questions, so find out the following at a minimum:

How are they paid? Do they get fees for referring you or are they paid a commission of everything they make you?

How do they communicate? Do they give you a call once a month or do they send letters and leave it to you to initiate contact? A trustworthy, transparent broker should be ready to answer all of your questions. Any sign of hesitation to communicate openly is shady and should send alarm bells ringing.

Do they specialize to suit your needs? If you have specific needs and are interested in one security over others, for example mutual funds over stocks, test your broker by firing off questions related to your plan or needs. This may not shed light into their trustworthiness, per se, but it will tell you if they are suited to your needs. There is more than one type of trust — there’s honesty, and then there’s competency. They two don’t always sync, yet both are crucial.

Summary

Finding a broker you can trust is a crucial first step, yet one so many investors spend little to no time on.

While word of mouth is still the most popular way to find a broker or investment adviser, at the very least you should run through the four points above. You should also learn about how to invest, especially if you are a beginner, so that you can also ask intelligent questions once you find one.

You wouldn’t trust just any old doctor with your health, so why trust just any old broker with your money?

Do your homework up front and it will pay off dividends in the future!


Originally published at The Daily MBA.

    Jarie Bolander

    Written by

    Engineer by Training. Entrepreneur by Nature

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