Full-service broker may still be worth higher expense

Mutual Funds

First, ask questions about background, style, customer availability

June 20, 1999|By Jeff Brown | Jeff Brown,KNIGHT RIDDER/TRIBUNE

Does anyone need a full-service stockbroker?

The case for such services seemed to weaken substantially recently when the largest practitioner of that approach, Merrill Lynch & Co., announced that it would get into the discount brokerage business by offering $29.95 commissions in December. Full-service brokers charge considerably more, mainly because they provide investment advice, which discounters don't.

For many, it might be wiser to hire a fee-only financial adviser to build a comprehensive plan that matches investment goals to short- and long-term needs, estate and tax planning, prospects for future income gains or declines and other factors. Not many brokers do all that, and the worst serve merely as salespeople too eager to rack up commissions.

If an adviser's financial plan is thorough enough, one should be able to meet most investment needs by picking an assortment of mutual funds with no further professional help.

And the investor who wants to dabble in individual stocks or bonds can do it through discounters, some of which charge less than $10 a trade -- though, of course, you're on your own.

Still, there are plenty of investors who want the advice of full-service brokers. If so, what should you look for?

As with any service, whether it's legal advice, health care or hair dressing, there is no way to guarantee up front that you'll be happy with the result. But you can improve the odds by asking the right questions:

Who are your typical customers? You want a broker who is accustomed to serving people with financial concerns similar to yours. That means people with incomes like yours, assets in the same ballpark and the same kind of time horizon.

How will you tailor your recommendations to me? A good broker will question you extensively about your finances, investment goals and willingness to take risk. Steer clear of one who instead emphasizes his great stock-picking abilities. Ask how your portfolio should be divided among stocks, bonds and cash, and why.

How often will we talk? If you want to kick things around with your broker once a week, will he or she be available? Will the broker call only to make a buy or sell recommendation, or will you talk regularly to review the portfolio and plot strategy?

What are your credentials? What is your educational and professional background? Have you ever been disciplined by a regulatory organization? What firms have you worked for? Get the broker's Central Registration Depository (CRD) number and check it out with the National Association of Securities Dealers (1-800-289-9999).

How do you get paid? Ask for the commission schedule and a list of all other fees. Commissions are often negotiable. Figure the purchase and sale commissions as a percentage of the typical investment you'll make. That will show how much an investment would have to gain for you to break even.

Will you consider tax issues? Taxes can chew up investment gains. A portfolio needs to be managed to minimize this with techniques such as offseting gains with losses. If the broker doesn't speak knowledgeably about this, get someone else.

Who will control the account? Don't give the broker authority to buy and sell on his own. Stocks and bonds are long-term investments; you're never in such a hurry that you need to cede control.

What services will I get? Will you receive the firm's research reports and newsletters? Will you get statements that make it easy to figure your investment performance and to calculate gains and losses for taxes? Ask for samples.

Can I start small? To evaluate a broker's advice, you should get his or her recommendations for six months or a year before starting to invest. If you can't get that, can you get discounted commissions so you can afford to invest small amounts during a trial period?

If you're happy with the answers to all these questions, sign up. But start small. A good broker should be happy to earn your confidence slowly.

Pub Date: 6/20/99

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