How to Choose a Broker

BACK in the bullish months of early 1987, it almost did not matter whether your stockbroker was a genius, a guru or simply somebody's smiling son in law. The momentum of the market was so strong that you were fairly well assured of making money.

That's no longer true in today's volatile market. So, choosing a brokerage firm for the first time, or switching to a new one, becomes a key decision. It isn't easy, particularly for small investors. Some firms don't want to bother with accounts of less than $15,000. Not many will turn you down flat, but your account is likely to get serious attention only if it can generate sizable commissions.

If you are a small investor, you will find that big, national brokerage houses generally are more hospitable than lesser outfits. These large companies stand to make a bit of profit from the sheer volume of their small accounts. Look for the major firms that offer special services, such as cut rate commissions.

But if you want to concentrate on investing in companies located in your own area, you might do better with well established regional brokerages. Their traditional strength has been in spotting small local companies that have gone on to become great winners. True, they also have a disadvantage: they often are less familiar with companies located far away, and with complex stock strategies, than are the larger national houses.

If you follow the market very closely yourself and feel you do not 'need regular, professional advice, then consider using discount brokers. They generally offer no frills and no hand holding, but they often charge commissions of less than 1%.

Once you have picked the brokerage house that you like, how do you select the salesperson in that firm just right for you? Choosing the right broker is not quite as important as selecting the right spouse or the best boss, but since the broker will do much to determine whether you are affluent or financially uncomfortable in the future, it is a decision to be taken seriously.

The first thing to do is to solicit recommendations. Ask friends who are themselves successful investors. Ask accountants and tax preparers. They have inside knowledge of how well their clients are doing in the market, and legally and ethically they can tell you who some of the winning brokers are.

If referrals don't produce enough candidates, write letters to the branch managers of some brokerage firms listed in your local Yellow Pages. Set forth your financial situation and investment goals. When replies come in, interview not just one but several brokers. Ask each one: How long has he or she been a broker? Where does he get his information? In what areas have his greatest successes been? What does he think is his biggest weakness? At the time he suggests buying a stock, does he also prudently recommend a price at which you should sell out in the future?

You are generally better off with a veteran, well experienced broker one who has been through a few market reverses, who knows that stocks can go down as well as up than with an eager newcomer who will learn his lessons with your money.

Instead of looking for a broker who will tell you what to do, search for one who can use his knowledge and experience to help you make your own decisions. Read financial publications and perhaps subscribe to an investment advisory service. Get various research reports from your brokerage house. Use them to learn the factors that professional analysts employ to evaluate stock.

Before doing business with a broker, don't be shy about asking him for the names of people whose accounts he handles. Then call up two or three of them. You might uncover some unexpected blemishes, such as a tendency to overtrade. Too much trading may produce high commissions for your broker but very small returns for you.

Be sure to evaluate your market performance coldly after you have been with the broker for six months. And then do it yearly. Compare your gains and losses with the Standard & Poor's index of 500 stocks. If your portfolio's performance, before commissions, falls below the Standard & Poor's, don't hesitate to take your money and run to another broker.