The Fool FAQ

Opening a Brokerage Account

The Fool FAQ

I'm looking for a discount broker. Whom does the Fool suggest?

We don't have any particular broker that we recommend. Many advertise with us, and they are all fine -- and we would appreciate your throwing some business their way if you are so inclined. We don't make recommendations, not so much because they are our advertisers, but because there doesn't seem to be that much difference between them.

We have message boards where Fools can discuss various discount brokers and, frankly, if you read those, you would think they all stink! But often, people only bother to write when they think there is a problem. And many of the problems are reported by day traders who have different standards for order execution that most Fools. (A 30 second execution vs. 5 minute execution is not going to make or break a long term investor!) Generally, we think that they are all about the same. You may like certain things better about one, like their reporting format, their website layout or their customer service department, but all of them will execute your trades with reasonable speed and accuracy -- except for those times when they don't!

Please visit our Discount Brokerage Center for additional information. We have information sheets for some brokers and phone numbers for many others as well as extensive guidelines for choosing a broker.

Is there a registry of those stockbrokers that have registered with the SEC? Is there a place that confirms that a given stockbroker can't just take off to the Caribbean with our money and stocks?

You can find out about the discipline history of any brokerage firm and sales representative by calling the NASD (National Association of Securities Dealers) at 1-800-289-9999. They can tell you if criminal or securities regulators have taken any action against your broker or firm.

To find out if your broker is licensed to do business in your state, go here for state-by-state contacts for securities regulators.

To find out if your brokerage firm is insured, contact the Securities Investor Protection Corp. (SIPC) at:

805 Fifteenth Street, N.W.
Suite 800
Washington, D.C. 20005-2207
(202) 371-8300.

So you wanna be a broker, eh? It's a complicated process. You can't just decide to be a broker -- there's some education and tests involved.

To begin with, it's a good idea to get a job at a brokerage firm. It helps to become acquainted with a highly placed broker or the branch manager and let them know of your interest. Becoming a broker requires college courses (economics) in most cases; sponsorship from a brokerage firm; and then tests. The Series 7 is just the beginning; you'll also need the 6, 63, and 65, as well as others.

If I have a portfolio with such-and-such a broker and the broker goes under for some reason, what is my exposure? Granted, they should have the actual stock certificates in some account, but what if they do not? Is there some underlying insurance on brokerage accounts?

All reputable brokers have insurance against such a situation through the SIPC. This typically protects accounts up to $500,000 ($100,000 of that can be in cash). Most brokers then purchase additional private insurance to cover losses beyond that, usually up to millions of dollars.

My broker has been making unauthorized trades in my account. What can I, what should I, do? Please help.

If this is a non-discretionary account--in which your broker is not authorized to trade without your specific authorization, yes, an unauthorized trade violates numerous laws and regulations. If the account is "discretionary" it is more complicated and you have to show the investment is inappropriate or something of that sort.

If you have just discovered an unauthorized trade and have not yet reported it, you need to quickly write a letter to your broker and point out the unauthorized trade or trades. Be polite, treat it like a clerical error, and ask that the trades be reversed and that you be "made whole," that is that your account be restored to the balance it would have had had these unauthorized trades never taken place.

As soon as possible, fax a copy of the letter to your broker and one to a superior in the brokerage. Then send copies via certified mail return receipt requested and keep both your fax receipts and the certified receipts in a safe place. Request that they confirm via return fax that the unauthorized trades are being reversed and that they do so at once.

Should they call you on the phone and promise or confirm something, send them another fax, confirmed by certified letter, detailing the agreement.

You do not say if you are dealing with a reputable brokerage house or if this is a penny stock dealer or something else. If this is a big NYSE member firm the odds are pretty good that it is either a clerical mistake --someone else's orders were punched into your account-- or a rogue trader. If you are responding promptly to your last brokerage statement you should quickly be able to get the trades reversed.

If you are dealing with a less reputable company, you could have a problem. In any case, if you do not receive a satisfactory response within two hours of your fax, send a second fax, this time going to the same people, plus the compliance officer and the President of the brokerage company. Once again, fax the letters, and follow-up by mail with a certified letter return receipt requested. Enclose a copy of your previous letter and state that if you do not get a satisfactory response within two hours of your fax you will report it to the authorities.

In addition, if you have the slightest doubt that this is not a clerical error, get your money out of the account and put in another account at a different brokerage where you have more confidence. Do not leave money with people you do not trust.

Who can I complain to about my broker?

If you are having trouble of any kind with a brokerage account, it is probably best to start with the brokerage itself. If a trade wasn't executed properly and it was the brokerage's fault, most will "make you whole," i.e. change your account to reflect the proper price, number of shares, etc. as though the trade were executed as you instructed. Of course, proving you case isn't always that easy so have your documentation ducks in a row.

If the brokerage isn't responsive to your request, you can contact the Securities Exchange Commission via their website at www.sec.gov, and the NYSE at www.nyse.com. Also, call the National Association of Securities dealers at 1-800-289-9999 to get the address of the district NASD office that serves your area. Send them copies of all correspondence. Fax them first and then send via certified mail return receipt requested. The NASD has a Regulations website at www.nasdr.com

I've had it with my broker, but I don't want him to know I'm switching to someone else. How do I go about it without having him call me and try to convince me to let him keep my account?

This is a surprisingly frequently asked question. First, you are in charge. Remember that. Fortunately, the system is on your side. Transfers of accounts are effected by the NEW broker, so whether you are switching from a discount broker who doesn't know you from Adam or "deserting" an old family friend, you don't have to discuss it with your current broker. Simply decide on a new broker, open an account with them, and ask them to handle the transfer. They will provide the authorization forms and handle all the paperwork.

Bear in mind that transfers can take up to three weeks, and your account will be effectively frozen during this time. You won't be able to trade or make any changes in the account from the time the old broker receives the transfer notice until the securities are in your new account.

Also, mutual funds may have to be cashed out rather than transferred. If that is the case, you can speed up the process by selling them yourself. Ask your new broker about this, and, if the account is not an IRA, take into account that selling a fund may be a taxable event. Even if you buy the same fund back within 30 days, you will be taxed on any gains created by the first sale. If you've held a fund for a long time, this can be a bummer. The good news is that your cost basis for the fund will be adjusted upwards (to the new buy-in price) so that when you ultimately sell it, you will be taxed only on gains since this time. Of course, if you were planning on being in a lower tax bracket when you ultimately sell, that isn't much consolation.

The real bummer is that if you sell the fund at a loss and you buy back into it within 30 days, you won't be able to claim the loss as a tax deduction. That is considered a Wash Sale. Of course, you can create a tax-deductible loss by simply buying into a different fund or putting the money in stocks.