How to Chose Your Stock Broker Part 2
Checking Out
In most cases, snooping isn’t considered polite. When choosing a broker, however, you want to do the intellectual equivalent of dumpster-diving. On Wall Street, the dumpster is the Central Registration Depository. The CRD database, as it is known, contains information about individual brokers and brokerage firms. Through this system, you can quickly discover complaints that have been filed against your broker, regulatory compliance issues, educational and employment histories, and—more important—verify that he is properly licensed. Why is this important? If you open an account with an unlicensed brokerage firm and it later goes under, you may not be able to recover your assets; not the kind of surprise you want.
To tap into the CRD, contact your state securities regulator or the National Association of Securities Dealers (NASD) Broker Check service at 1-800-289-999 or http://pdpi.nasdr.com/PDPI. It’s completely free!
SIPC Protection
There’s one last thing you must do before opening an account: Check to make sure that your brokerage firm is part of the Securities Investor Protection Corporation (SIPC) by clicking over to www.sipc.org/who/database.cfm. This ensures that if your broker goes out of business, you will recover up to $500,000 in assets, $100,000 of which may be in the form of cash. SIPC participation does not protect you against declines in the market value of your investments. Many firms will purchase additional insurance to give their clients added peace of mind.
If you are still not appeased by the idea that your account could go up in smoke should your broker fail, you can enter into a custodial agreement with your local bank. When you execute a trade, your broker will contact your bank which will transmit the funds necessary to complete the transaction. The broker will then deliver the securities purchased to your bank for safekeeping. In many cases, the custodian will also perform other functions such as collecting dividend and interest income on your behalf and monitoring corporate actions (e.g., stock splits). Despite the added expense, this is a good option if your assets are considerable.
