What You Should Know 

Recognize that a stockbroker is a salesperson. 

Most investors pay for broker services through a commission on each investment transaction. A good stockbroker will propose investments that are tailored to your goals and financial situation. However, it is possible that the amount of money the broker will earn from your investments can influence his or her recommendation. 

Keep in mind that brokers' earnings generally come from how often and how many shares their clients buy and sell, not from the success of the particular investment. In other words, brokers can make money even if you don't. Although your stockbroker has a long-term incentive for you to succeed - to keep your account and gain your referrals - your broker also has a short-term incentive to earn commissions. Consider any recommendation to buy or sell stock just as you would any other solicitation. Don't confuse a sales pitch with impartial advice. 

Noted personal finance columnist Jane Bryant Quinn recommends that you ask your broker these questions every time he or she recommends an investment: 

Why are you suggesting this? 

Does it meet my investment goals? 

What are the commissions and other transaction costs? 

Make it your business to learn about commissions. 

Commissions come in every shape and size. Depending on the investment product, you will find up-front commissions, commissions spread out for as long as you hold the product, or those paid when you sell the product. Commissions paid at the time you invest are called front-end or up-front fees, or "loads." Commissions paid when you take your money out of the investment are called back-end fees or "deferred loads." On some investments, such as municipal bonds, brokers don't get sales commissions. Instead, they are paid from the "mark up" - the difference between the price the brokerage firm pays to buy the investment and the price it charges you. 

Be aware that commissions can reduce the value of your investment. For example, if you put $10,000 into a mutual fund and your broker earns an up-front 5 percent commission on the transaction, $500 would go to the broker and $9,500 would be invested. 

Always know what you are paying your broker. 

You have the right to full disclosure of all costs of each investment. Ask your broker about commission rates, annual fees, transaction costs, and any other expenses. No fee should show up on any confirmation slip or account statement that you haven't been told about in advance. Make sure you have no surprises by asking ahead of time about commissions and comparing costs with other brokers. 

The bottom line: 

You have the right to full disclosure of all investment costs from your broker. 

Be aware of sales contests, bonuses, and other payment practices. 

Brokers may encourage you to buy certain investment products that bring them extra income through higher commissions, bonuses, or even points toward a vacation. Some brokerage firms give their brokers incentives to sell "house brand" investment products created or managed by the firm. More risky or complex investment products could earn a broker a higher commission, resulting in your increased risk and the broker's gain. 

When a broker recommends an investment because of special incentives, you run the risk that the broker places interest in earning points for a vacation ahead of selecting the best investment for you. It's appropriate to ask brokers if they are receiving any special compensation for their recommendations. 

Read and understand your confirmation slips. 

A confirmation statement is exactly what it sounds like-a notice confirming your buy or sell order. It should show the product, price, and broker's commission. 

Even if the confirmation states "zero" for commission, this does not necessarily mean the broker has not been paid. For example, you won't see the broker's compensation when you buy new issue stocks and bonds because the commission is paid by the issuing company. Stock and bonds sold out of the brokerage firm's inventory also may not show a commission. However, a broker makes money on every one of your transactions. In fact, your broker may earn more on these "zero-commission" sales than by selling other investments. 

Keep track of your confirmation slips. If the commission isn't shown, ask what the broker is getting paid and make note of it on your confirmation slip. These slips will come in handy to tally up what you pay each year in fees and commissions. 

Read and understand your monthly account statements. 

Each month your brokerage firm sends you an account statement. Don't throw it away or toss it in a drawer. Make sure you review it each month. Be smart about what the statement tells you and how to use it to your advantage. 

Set up a system to track two important items: how you're doing and what it's costing. Keep a running list of the commissions and fees you pay for your investments. If you see transactions you didn't authorize, or if your broker appears to be trading excessively, contact your broker's supervisor immediately. Don't wait to see how the investments perform, as waiting may be viewed as giving your approval to the unauthorized trades. 

Consider alternative compensation arrangements. 

Some brokerage firms offer accounts with no commissions. Instead, you pay an annual fee, usually based on the amount you have invested. In return you get a certain number of trades each year. Such a fee arrangement presumably removes any broker incentive to sell high-commission products or to increase trading frequency to earn higher commissions. Under a fee arrangement, the broker's income rises only if your assets do. Talk to your broker about flat-fee arrangements or try to negotiate a lower commission-per-transaction rate. 

Check out a broker's record. 

Before working with any broker, take a look at his or her training and disciplinary records. The National Association of Securities Dealers (NASD) and your state securities agency can provide you with extensive information on any broker you are considering working with. This could help you spot a broker you don't want to trust with your money. Too many people have lost their life savings because they were too polite, or too trusting, to check out a broker's credentials. 

Any broker should be properly registered with the National Association of Securities Dealers and your state's securities agency. 

For More Information 

National Association of Securities Dealers
The National Association of Securities Dealers (NASD) has a Public Disclosure Line for information on brokers. Call 1-800-289-9999. On NASD's Web site, you can learn about its Regulation Complaint Program and can file a complaint online against a stockbroker. 

North American Securities Administrators Association (NASAA)
The NASAA can give you the telephone number of your state securities agency. Go to their Web site on Find Regulators.
URL: www.nasaa.org/ 

Federal Trade Commission (FTC)
The FTC has more information on investment risks and tips for informed investing.
URL: www.ftc.gov/bcp/conline/pubs/invest/invrisks.htm 

Securities and Exchange Commission (SEC)
The SEC can help you check out brokers and advisors.
URL: www.sec.gov/consumer/jchkout.htm