If you rely on a broker or professional advisor to help you make investment decisions, you'll want to make sure your broker or advisor is someone you trust -- and someone who understands you and your goals. After all, it's your money.

In a recent study on U.S. investors by the FINRA Investor Education Foundation, 56% of respondents said they use a broker or professional advisor for at least some investment decisions. If you are thinking about opening an account with a broker, read on to find out what to expect during the account opening process so you can feel confident in your selection.

In the first installment of our two-part series on opening a brokerage account, we laid out the types of personal information you will need to provide when you open an account with a brokerage firm. In this second installment, we prepare you for some of the decisions you will need to make during the account opening process and provide a list of questions to ask your broker.

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Decisions you'll need to make

The forms provided to you by your brokerage form will ask you to make some important decisions about your account. Here are some questions you should be prepared to answer.

  • Do you want a cash account or margin account? Most brokerage firms offer at least two types of accounts: cash accounts and margin accounts. In a cash account, you must pay for your securities in full at the time of purchase. In a margin account, although you must eventually pay for your securities in full, your broker can lend you funds at the time of purchase, with the securities in your portfolio serving as collateral for the loan. This is called buying securities "on margin." The shortfall between the purchase price and the amount of money you put in is a loan from the brokerage firm, and you will incur interest costs, just as with any other loan. Purchasing securities on margin is not for everyone. If the value of your securities declines significantly, you may be subject to a "margin call." This means that the brokerage firm can either require you to deposit cash or securities to your account immediately or sell any of the securities in your account to cover any shortfall without informing you in advance of the sale.
  • How do you want to manage your uninvested cash? Sometimes there is cash in your account that hasn't been invested. For example, you may have just deposited money into your account without giving instructions on how to invest it, or you may have received cash dividends or interest. Your brokerage firm typically will automatically place -- or "sweep" -- that cash into a cash management program (customarily known as a "cash sweep" program). Different cash management plans offer different features when it comes to interest rates, insurance rates, and other benefits. Be sure you understand your options so that you can make an informed decision if you are asked to choose one.
  • Who will make the final decisions for your account? You will have final say on investment decisions in your account unless you give "discretionary authority" in writing to another person, such as your financial professional. With discretionary authority, this person may invest your money without consulting you about the price, amount or type of security, or the timing of the trades that are placed for your account. There are other types of authority that you could provide over your account, including power of attorney and authorized trading privileges. Make sure you think through both the upsides and the downsides involved in allowing someone else to make decisions regarding your money.

Questions to ask your broker

No matter your level of investing experience, asking questions can be a great beginning to your relationship with a new broker. It's your money, so take charge. To get you started, here is a list of questions to ask your broker.

  1. Is this a margin account or a cash account? Can you explain the differences between the two?
  2. What choices do I have regarding cash sweep programs? What are the different features, including interest rates and federal insurance coverage? If the firm offers both bank deposits and money market funds, what are the advantages and disadvantages of selecting one over the other?
  3. Can we discuss options for who will control decision-making in my account? What happens if I become temporarily or permanently incapacitated?
  4. How often will I get account statements? Who will provide the statements, and will they be online or in paper? What should I focus on when I receive them?
  5. Will my securities be registered in my name? Or in the name of the firm? Can you explain the differences between the two?
  6. What are all the fees relating to this account? What do you charge for commissions? Are there any other transaction or advisory fees? Do I get charged a fee for not maintaining a minimum balance? Do you charge account maintenance, account transfer, account termination fees, wire transfer fees, or any other fees? Is there a place on your website where I can find a list of all fees relevant to my account?
  7. What services am I getting with this account?
  8. Who do I contact if I have a question or concern regarding my account? What are the different ways I can contact my account representative or his or her manager? Phone? Email? Local branch office?

Monitor your account

After you open your account, you should monitor its activity regularly. Review the account statements and trade confirmations you receive for any errors or any transactions that you did not authorize. If you see any evidence of unauthorized trading or other suspicious items, notify your broker or the brokerage firm's compliance department immediately to get answers to your questions. Make sure you take notes of any conversations you have with your firm concerning a dispute.

If the issue cannot be resolved over the phone, send your complaint in writing to the firm and be sure to keep a copy for your records. If you are having trouble getting answers to your questions from your broker or firm, you can contact FINRA's Securities Helpline for Seniors at 844-57-HELPS (844-574-3577) -- or file a complaint using our online complaint form.

You will also want to revisit your relationship with your broker periodically to make sure it is meeting your expectations and goals. And don't forget to check out FINRA's BrokerCheck tool from time to time to see if anything in your broker's history has changed.

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