Write down your investment objectives
Why have you opened a brokerage account? To save and invest for retirement? Buy a house in 5 years? To pay for your children’s college education? To aggressively seek capital gains? Whatever the reason you should put it in writing and give it to your broker.
When brokers open new accounts, the customer must complete a New Account Form. This form should clearly indicate the customer’s investment objective and risk tolerance. Make sure that your investment objective and the degree of risk you are willing and able to assume are reflected accurately on the form. If you sign it and its not accurate the brokerage firm can hold it against you in the event you lose money in the account. If you sign the form and the portions of the form reflecting investment objective and risk tolerance are not completed you can bet that, should a problem arise in your account at a later date, the broker will fill in the blanks after the fact. You can be assured that the manner in which the broker fills out the form at that time won’t do you any favors. Its too late for you to make sure the form is accurate and you’ll be surprised at what “your answers” reflect about you. The broker will fill out the form in such a manner as to cover their own backside. It happens. Don’t let it happen to you.
Don’t sign the “trading” or “speculation” boxes on the form unless you are using your account to gamble.
Do not give your broker advance permission to trade
Brokers sometimes request discretionary authority. Discretionary authority allows the broker to decide on their own what and when to buy and sell. They don’t need to ask for your permission prior to executing transactions in your account. Providing discretionary authority is rarely a good idea.
Keep the documents your broker sends you
Request a copy of your New Account Form even if the account has been open for years. Every time something is bought or sold in your account a Trade Confirmation will be sent to you. Depending on your account every month, or perhaps every three months, an Account Statement will be sent to you. From time to time Offering Materials may be sent to you. Keep these documents.
Read the documents your broker sends you
When you receive documents from your broker, don’t put them in a drawer, read them! If they are not accurate, immediately inform your broker in writing.
Communicate with your broker in writing
The brokerage business is overwhelmingly conducted by telephone, or online in the case of online brokerage firms. If a dispute arises with respect to what you told your broker on the phone, it is your word against their word. This works to the advantage of the broker almost every time. It is always best to communicate with your broker in writing. It may not always be feasible to put every buy and sell order in writing. But, in the event there is any problem with the account (e.g., unauthorized transaction, inaccurate information on the New Account Form) always send a written complaint to the broker. Make sure you keep a copy of that written complaint so that it doesn’t disappear.
Make sure your investments are explained to you in plain English
If you don’t understand how your money is being invested, it probably shouldn’t be invested in that manner.
Keep track of how much money your broker is making from your account
You can be sure that your broker and brokerage firm know exactly how much money they are making from your account. They have the information, you should have it also. Ask them for it. If they deny being able to provide it to you, they’re simply not being honest with you. (How do you think brokers know how much their paycheck should be each month?) The mere fact that you ask them for this information lets them know that you’re paying attention to how your account is being handled and may, in and of itself, prevent wrongdoing in your account.
Never buy under pressure
Rarely are there purchases or sales that have to be pursued immediately. Take your time and think about what you’re doing. The clearest sign of trouble is a broker who is trying to pressure you to take action immediately. Just say “no”.