Avoiding a Lousy Broker

1) Hang up on cold calls. You are asking for trouble if you agree to turn over your money to a telephone caller. This isn't to say that all the brokers dialing for dollars are up to no good. It's a rite of passage for greenhorns at the big brokerage houses to make cold calls. But regardless of who is on the other end of the phone, you should never sink money into anything without seeing written documents about a security.

2) Do a background check. You might be amazed at all the information you can gather about a prospective broker. It's now easier than ever to uncover a time bomb in a broker's background.

The places to contact for this information are the North American Securities Administrators Association (NASAA) at (202) 737-0900 and the National Association of Securities Dealers (NASD) at (800) 289-9999 (www.nasdr.com/2000.htm). It's best to call both sources just in case files are incomplete at one of the organizations.

With two quick phone calls, here's what you can learn:

  • Any pending arbitration hearings and civil litigation against a stockbroker.
  • Written customer complaints alleging forgery, theft or misappropriation of funds or securities during the past two years.
  • Formal investigations involving criminal or regulator matters.
  • Outstanding liens of judgments.
  • Ten years of employment history.
  • Bankruptcies.
  • Bonding company denials, payouts or revocations.

While you're checking out a broker, inquire about troubles his or her brokerage firm has had. This could be invaluable information for anybody using an obscure brokerage firm. The same two organizations will provide you with the information.

While you're checking out a broker, inquire about troubles his or her brokerage firm has had. This could be invaluable information for anybody using an obscure brokerage firm. The same two organizations will provide you with the information.

Lynn O'Shaughnessy is a former Los Angeles Times reporter and president of an investment club that has beaten the Standard & Poor's 500 Index for the past four years. As a personal finance writer, her articles have appeared in Mutual Funds magazine, Bloomberg Personal, Individual Investor, and many more.

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