Washington State Department of Financial Institutions

Choosing an Investment Professional, Stockbroker, Registered Representative, Account Executive

One of the first things you need to do after you have made the decision to use an investment professional is decide whether you will use a full service or discount broker.

A discount broker:

  • generally charges less commission. Employees of discount brokers are usually paid salary not a commission;
  • generally does not recommend specific investments or investment strategies.
  •  A full service broker:

  • generally charges commissions based on the number and size of transactions made in your account;
  • will generally recommend specific stocks or investment strategies that are intended to suit your financial goals.
  • Take your time when choosing your investment professional. A good place to start is with friends or associates you know that have been successful investors. Bear in mind, however, that investing is highly personal. Other individuals will likely have different financial goals, needs, objectives, temperaments, and investment philosophies. It is critical to understand that the quality of investment services you receive will depend not only on the firm you choose, but also on the individual investment professional within that firm. Your goal is to find an investment professional who will be able to understand your investment goals and your investment personality.

     After you have narrowed the list down to 2 or 3 firms and/or individuals ask for the following:

  • A brochure that describes the firm's investment options;
  • A list of services the firm offers;
  • The types of investment recommendations the firm has made over the past year;
  • A copy of the firm's commission rates.
  • It is a good idea to do business with an investment professional that you can sit down with and talk to face to face. If you later have a problem with your investment professional, it may be easier to deal with the problem if he or she lives and works in your community.

    It may be a good idea to meet first with the office manager to discuss your particular investment goals. He or she may be able to recommend a particular broker he or she feels meets your needs or investment personality. When you do meet with a prospective investment professional:

  • Remember this is an interview not a friendly chat.
  • Don't be intimidated by an impressive office, or a smooth sales pitch. These have nothing to do with your investment needs and objectives, which you must keep foremost in your mind.
  • Be honest and discuss your financial objectives fully with the potential investment professional.
  • Ask questions and listen carefully to the answers. Taking notes is always a good idea.
  • Ask how the investment professional is compensated.
  • There are no dumb or silly questions when it comes to understanding how your hard-earned money is going to be invested. Ask any question that comes to mind until you feel comfortable. If you get the impression that the broker is becoming impatient or is condescending toward you, go elsewhere.

    Make sure that the firm's products, services, recommendations, and commission structure are compatible with your investment goals and that you are confident that the particular broker you have chosen will help you meet those goals.

    Check to see whether the brokerage firm is a member of any national stock exchange or of the NASD (National Association of Securities Dealers) and SIPC (Securities Investors Protection Corporation). The NASD is a national self-regulatory organization whose membership includes almost all of the broker-dealers in the United States. SIPC is a quasi-governmental entity created by Congress to insure the cash and securities of SIPC members' customers in case a member goes into bankruptcy. SIPC does not insure the outcome of any given investment. It only protects investments from being jeopardized by financial difficulties which SIPC members may experience. It cannot and does not protect you from losses resulting from bad investment advice or if the market takes a downturn and the investment losses money.

    Before you deal with any investment professional or brokerage firm, contact the Department of Financial Institutions Securities Division @ 360-902-8760 or 1-877-RING DFI (1-877-746-4334) to verify that the firm and the investment professional are duly licensed to do business in this state. You can also find out whether or not the firm and investment professional have any complaints against them or have been disciplined by any government regulatory agency.

    The New Account

    The first thing you will be asked to do after you have decided on an investment professional is to fill out the "New Account Form". Investment professionals are bound by the "know their customer" rule. Simply stated, this means that your investment professional is forbidden to place you in an investment that is "unsuitable" for you. However, the only way that your investment professional can observe this rule and know what is suitable for you is for you to be absolutely honest with them.

    Don't overinflate your financial status in order to impress your investment professional. Remember, the consequences can be disastrous. Incorrect information could result in your investment professional placing you in unsuitable investments. Under these circumstances, any losses would be your responsibility, not the investment professional. 

    The new account form, and any others forms, are intended to protect the investor, the firm and/or the investment professional. Make sure that you understand all the terms on these forms. Typically, the investment professional will ask the new investor for information on their assets, income, financial objectives, and investment experience. Based on the answers to these questions, the broker will ask you to check boxes next to the appropriate investment objective. Again, honesty is all-important here. Often the terms on the new account form can be very confusing. Ask your broker exactly what each term means before you check one. If you are not comfortable with the definition of the terms, don't check them. Insist that your investment professional note what your goals are in language that you understand. For example, if your spouse has recently passed away and you have received an insurance settlement upon which you will be relying for living expenses, this money is likely irreplaceable. Therefore, your goal may be ultraconservative, such as "preservation of capital." If this option is not on the form, make sure that your desires are noted on the form by your investment professional.

    Always ask for a copy of the new account form and make sure that all information is entered correctly. Unless a particular objective is a specific goal, it should not be checked. Some investment professionals will list objectives in order of preference. At the time, this may seem logical, but if there is ever a problem with an investment, the fact that speculation is checked at all could mean that you do not have a basis for a complaint. It is advisable to write your investment professional a letter stating your financial goals, your investing experience, and your understanding of what he or she said. Keep a copy for your investment notebook and ask the investment professional to put it in your file at the firm. Always keep copies of everything you sign and all correspondence.

    Make sure that your new account form is current. As your circumstances change, you need to update your new account form.

    A Wise Investor is an Informed Investor

  • A recent national survey of investor knowledge and investing habits taken by the Investor Protection Trust shows that fewer than one in five US Investors are financially literate. Most lack even the basic knowledge about financial matters specifically related to investing.
  • Gender/Age Gap. While 25 percent of the men scored in the knowledgeable sections, only 11 percent of the women scored as knowledgeable. However, almost half of the mature investors (65 and older) fell into the least financially literate category versus 29 percent of younger investors.
  • Mutual Fund Fees. Almost two-thirds of the investors questioned mistakenly believe that a "no-load" mutual fund involves no sales charges or other fees. While a "no-load" fund may not involve a front-end sales commission, all mutual funds impose management and other fees.
  • Diversification. Only half understood that the purpose of diversification is to reduce risk. This is the basic rationale for mutual fund investing.
  • Bonds. Only 39 percent knew that when interest rates go up the prices of bonds usually go down. Many of the least sophisticated and most risk-adverse investors invest in bonds.
  • Learn as much as you can about each investment. Understand its inherent risks, its benefits, and how it will fit your investment strategy. Keep up on the trends in the market, new investment possibilities, or other relevant financial information. You can receive this information from your investment professional, the library, and financial magazines and newspapers or on the Internet. Ask your investment professional for copies of any research or other materials that were used in making the decision to recommend the particular investment.

    Don't invest if you don't understand. Steer clear of anything you can't explain in plain, simple language to a friend. Research by going to the library, asking questions of your investment professional or other professionals. Attend investment courses at the local college. There are many books available at your local bookstore, which explain investments in terms that are easy to understand. The more you know about the different types of investment products you are likely to be offered, the better you will be able to decide whether that particular investment product is suitable for you and your investment goals. 

    Good communication is essential. At the time you open your new account, you and your investment professional should decide on the level of communication necessary. It will vary greatly depending upon your objectives. If you have 4 or 5 investments invested for long-term conservative growth, you will probably only need to communicate with your investment professional once or twice a year. If, on the other hand, you have a large portfolio consisting of aggressive growth investments, you may want to talk with your investment professional several times per week. In any event, your investment professional should be willing to speak with you whenever you have questions regarding your account. Keep up on the current value of your investments. Read the annual reports, especially the statement of the company's earnings, past performance, and where it is headed. Many financial sections of papers carry stock tables that report daily price changes, yields, price earnings ratios, profiles of price movements, etc. They also report corporate and financial trends that may be relevant to your investments. You don't have to be a financial wizard to understand the basics of your investments. A little basic knowledge will go a long way towards self-protection and successful investing. 

    You may decide to purchase a speculative investment, whether recommended by your investment professional, or at your own initiative. This may not represent a change in your overall investment objectives. Perhaps you received a bonus or some unexpected windfall and decided to be a little risky with that money only. Make sure that your investment professional understands this and doesn't make changes to the original objectives on your new account form. Follow up this investment decision with a letter stating that this particular investment does not constitute a change in your overall investment objectives, keeping a copy for your investment notebook. 

    Be very skeptical of investment professionals who minimize the degree of risk involved in an investment strategy. An important element in evaluating any investment is the knowledge that there are no risk-free investments. Demand straight answers to the question of risk. If you sense that it is being soft-pedaled or misrepresented, don't invest or seek a new investment professional.

    Dealing With Problems in Your Account

    Most dealings with investment professionals are straightforward and trouble free. Provided the investment was appropriate for you, was presented to you fairly, and purchased by you knowing the risks involved, you cannot blame your investment professional if it is not as successful as you hoped.

    However, sometimes problems do arise. Here are some steps to take to protect yourself. 

    Discuss the situation immediately with your investment professional. Most problems can be resolved quickly and satisfactorily. If you do not receive a satisfactory response, take the problem to the branch manager. If you are still not satisfied, contact the compliance officer at the firm's head office. Remember, always follow up oral communications with a letter confirming the conversation and the proposed resolution. Keep a copy for your investment notebook. At this time, you may also wish to register a complaint with the Department of Financial Institutions Securities Division.


    If you do not achieve an acceptable resolution through these channels, you may wish to consider initiating an arbitration claim or legal action. Most customer agreements with an investment professional include an "arbitration clause" requiring arbitration if you have a dispute. There are no state or federal laws requiring a person to sign an agreement that requires arbitration.  

    Arbitration is a method of having a dispute between two or more parties resolved by impartial persons who are knowledgeable in the area of controversy. Arbitration offers a less costly and generally faster means of resolving a claim than traditional litigation. It is very important for you to realize, however, that arbitration awards are final. You should seek legal advice before agreeing to arbitration.

    Choosing an Investment Professional, Financial Planner, or Investment Adviser

    Before you deal with any financial planner or investment adviser, contact the Department of Financial Institutions Securities Division @ 360-902-8760 or 1-877-RING DFI (1-877-746-4334) to verify that they are duly licensed to do business in this state. You can also find out whether or not they have any complaints against them or have been disciplined by any government regulatory agency.

    Financial planners don't have CRD reports, but they must be registered if they give investment advice. Ask to see their Form ADV. If they don't have one or won't show it to you, don't do business with them.

    A financial planner is one who provides you with a comprehensive master plan for all aspects of your finances. This includes advice on tax planning, estate planning, insurance, educational funding for your children, real estate, and investments, including securities. 

    In dealing with a financial planner or investment adviser, you are turning over information that reveals a great deal about yourself. 

    It is vitally important to choose someone you can trust and who is qualified to meet your needs.

    Financial Planners by Types of Compensation

    Both the Fee and Commission and Commission Only advisers must be dually registered.

    Education and Experience 

    Many financial planners hold industry designations such as CFP (Certified Financial Planner), CFA (Chartered Financial Analyst), PFS (Personal Financial Specialist), etc. Each group has training, education, and experience requirements as well as strict codes of ethics. Ask for the name, address, and phone number of the organization and check it out. Also, if the financial planner claims to hold an undergraduate or graduate degree (such as an MBA) from a particular university, call the registrar of that university to confirm that such a degree was actually conferred. To help you better understand the planners' credentials, ask: 

    In choosing your financial planner, as in choosing any other professional, the more you know about them, the better you will be able to make a choice. In addition to the questions listed above, ask the your potential planner these questions: 

  • If you are solicited over the phone or by mail: how did you get my name, phone number and address? Never do business with someone over the phone or in response to a piece of mail until you have checked them out just like you would one you meet face to face.
  • How long have you been doing financial planning and working directly with clients?
  • Are you experienced in my area of interest? (Example, retirement planning.)
  • What is your typical client profile? (Is it mixed or specialized.)
  • May I see a few sample plans? (Watch out if the planner refuses or if all the plans provided seem nearly identical.)
  • Will you provide the names of three or more clients that you have counseled for a minimum of two years? (If not, it is probably a good idea to look for another planner.)
  • May I have a list of professional references? (Don't be shy about calling them. It is not unheard of for an unscrupulous planner to list as a reference an attorney who did nothing more than file the planner's incorporation papers years before and is not aware that the planner is using the attorney's name as a reference.)
  • Will I be working with you or your associate? (Check the associate out just as you would check out the planner. Don't rely on the reputation and credentials of one planner if you will be working with another.)
  • How long have you been in the community? (Be wary if you cannot find out any information about their prior background.)
  • Services

    Your investment plan should include the following depending upon your personal objectives: 

    Communication between you and your planner must be open, honest, and two way. Here are some pointers to consider:  

    In Closing

    Like every other industry, the world of stockbrokers, financial planners, and investment advisers has its con artists and abusive salespeople. Some of the red flags are: 


    No investment offers a big reward without a corresponding risk.  If someone tries to convince you they have a "sure thing" that will guarantee a big return on your investment -- find someone else to handle your investment.  If, however, you are willing to assume some risk -- rather than none -- you do improve your chances of getting a better return on your money.

    Education is the key to better investing. Taking the time to know what you're investing in and the person you choose to do your investing will pay off.

    Remember, It'$ Your Money

    Before making an investment or doing business with a stock broker, investment or franchise promoter, call the Washington State Securities Division at 360-902-8760 or 1-877-RING DFI (1-877-746-4334) to find out it they are properly registered or have a disciplinary history.  Call us also if you have questions or wish to file a complaint.