The Financial Industry Regulatory Authority (FINRA) maintains BrokerCheck, an online database that enables anyone to quickly obtain a summary background report about virtually any stockbroker. This search tool is easy to use and its reports are generated free of charge, yet most people still select brokers without running their names through BrokerCheck. That’s a big mistake because you can’t intelligently choose a broker without first knowing the answers to these five essential questions.
1. How many firms has this broker worked for, and how long did the broker remain at those firms?
While it’s not uncommon for stockbrokers to move around a bit, be wary of the nomadic broker who has had short tenure with many different firms. That’s the hallmark of someone who repeatedly has run into trouble and has been fired or forced to resign to avoid termination.
2. Has this broker ever been subjected to discipline by FINRA, the SEC, or a state securities regulator?
If a broker has been the subject of discipline by regulators, that fact is supposed to be noted in the BrokerCheck report. You might also want to contact your state’s department of securities to see whether it has any disciplinary information on the broker.
3. Has this broker ever been the subject of a customer’s complaint in a lawsuit or arbitration case?
Some investors only want a broker with a pristine record, while other investors might be willing to overlook one or two old or isolated complaints. The BrokerCheck report includes basic facts about complaints, suits, and arbitration claims involving the broker. If you see a report that contains recent complaints, suits, or arbitration claims, especially if multiple customers have made similar allegations, steer clear of that broker.
4. Have customers who brought claims against this broker won awards or received significant settlements?
A disgruntled customer will sometimes assert a questionable claim against a broker. Such a claim would likely result in an arbitration award in favor of the brokerage firm or a nuisance settlement amounting to a tiny fraction of claimed losses. But if the BrokerCheck report shows an award in favor of the customer or a settlement for more than nuisance value, you can be pretty sure the customer’s complaint had validity.
5. Is this broker subject to unsatisfied civil judgments or liens?
The BrokerCheck report will show you whether the broker has existing liabilities such as tax liens or unpaid judgments. This is a sign that the broker may not be the kind of disciplined and organized advisor you’re looking for. But even worse, a broker with financial problems might be more tempted to steal your funds, churn your account to increase commissions, or sell you unsuitable high-risk securities that provide above-average commissions. Avoid the risk by avoiding that broker.
Hugh Berkson is a Securities Attorney with McCarthy, Lebit, Crystal & Liffman, Co. LPA. Hugh is rated AV® Preeminent™ by Martindale-Hubbell®.
He obtained a business degree in Finance from the University of Texas at Austin in 1989, and is a 1994 graduate of Case Western Reserve University School of Law, where he was a member of the Order of the Barristers and received both the American Jurisprudence Award, (National Mock Trial) in 1993 and the Jonathan M. Ault Mock Trial Prize for 1993-1994.