Questions to Ask a Broker-dealer

How long has the broker-dealer been in the broker-dealer business? What is the financial strength of the company?
The company should be profitable and have adequate capital to conduct its daily business and to enable it to grow as the market demands. Some broker-dealers are public companies, so obtaining financial information on them is easy. Some broker-dealers are owned by larger companies, banks, or related financial services firms that are well capitalized. In any event, you should insist on getting financial information when you get to the serious stage of consideration.

In which states is the broker-dealer registered to do business?
This usually is not a problem with large firms but may be with smaller, local firms.

Please describe the background and experience of the key management personnel.
Managers of the company should be experienced professional with a history of performance and an understanding of the type of business you do. Additionally, there should be depth of management so that the loss of a key individual will not adversely affect you or your clients.

What type of errors and omissions program does the broker-dealer have?
What are the limits of liability on your E&O insurance? Are legal costs included? What is the annual cost?

Is the broker-dealer a registered investment advisor (RIA)? Must I do business under the firm’s RIA or can I establish my own?
If you are considering opening an independent office, this can be a very important question in terms of the identity you build in your community. It can also make a difference in the fee you retain from your fee-based clients.

What is the compliance history of the broker-dealer?
A firms compliance history can also be checked through the FINRA website: http://www.finra.org

How does the broker-dealer administer and enforce its compliance procedures?
If you have compliance questions, to whom do you go and how fast can you expect answers? The firm should have a strong compliance orientation. It is important for your reputation that the firm pays strong attention to this area. Weak compliance can lead to lawsuits and arbitrations for the firm and serious financial consequences to you.

How does the broker-dealer support me if a client sues or files a complaint against me?
This varies widely with the specific firm and whether the representative is independent or an employee of the firm, but it is extremely important to understand up front.

What is the broker-dealer’s commitment to supporting advisors with independent offices?
If you are considering opening your own office, the firm you choose should understand the psychology of the entrepreneur – and be fully committed to supporting an independent branch network over the long term. A company with a minimum of 3-5 years experience doing this is desirable.

What mutual funds, variable insurance products, and fee-based programs are on the broker-dealer’s approved list? What is the process for adding products not on this list?
It is wise to avoid situations where you will be required to sell or financially rewarded above the norm for selling proprietary products.

Will I be able to provide a consolidated statement to my clients, including costs basis information?
More clients than ever before want a “financial snapshot” of their entire situation.

What other complementary products and services are available to the client?
One-stop shopping and the marketing power of offering multiple products and services are becoming more attractive to clients all the time. Examples include trust services, banking, loans, financial planning.

Tell me about the broker-dealer’s trading desks.
Access to experienced trading personnel who are service-oriented and motivated to help you do business competitively is very important. It is preferable to deal with trading desks that are not limited to in-house inventories but will “go to the Street.” It is also important to understand mark-up policies. Some trading desks are serious profit centers, other are not. This can affect your ability to provide competitive pricing to your clients.

How are trading errors and disputes handled?
It is important that the broker-dealer communicate with you when resolving errors and disputes. Some broker-dealers will settle with a client without adequate input from the rep.

Is the broker-dealer a market-maker in Nasdaq stocks? If not, which market-maker do you use?
This may or may not be important, depending on your mix of business, but the ability to be competitive and get good execution is important to many brokers.

Please describe the broker-dealer’s bond trading operation.
Does the firm keep an inventory of bonds? If so, what types? What bond dealers do they work with? What is their markup and what do they charge clients?

What research services do you offer? Are these available online, and what are the costs?
The availability of top-quality investment research and product due diligence can make a big difference in the credibility you have with your clients – it can help your client to recognize the added value he or she gets from you. It can also save you a lot of time. You should know what is available for stocks, mutual funds, and variable life insurance and annuities.

Please describe the broker-dealer’s account insurance coverage.
Be sure that the firm has coverage that meets the needs of your clients.

Tell me about the transition process. What assistance does the broker-dealer give me in moving my accounts and getting established with the firm? 
You need to know what initial steps the broker-dealer will take to assist you in moving your customer accounts and, if going independent, in the establishment of your branch office. This varies widely with each firm.

Who owns the client relationship? What happens to my accounts if I choose to leave the broker-dealer at some time in the future?
A broker-dealer is required to offer the client the option of staying with that broker-dealer if you leave. They are not obligated, however, to market to them aggressively.

What types of programs does the broker-dealer have for brokers who wish to sell their practices? Will the company help to finance a buyout between brokers?
An increasing number of brokers are giving serious thought to how to structure an exit strategy from the business. Since this process normally takes several years to implement effectively, it makes sense to think ahead and consider your options.

How “state-of-the-art” is the broker-dealer’s technology and how will this technology help me do more business and render better service to my clients? How is this technology delivered and implemented for my clients and me? What is the cost?
Technology is the great equalizer among firms today and can vary widely. These disparities will disappear over the next few years, however. But good technology can save you much time and money in servicing your clientele.

With which portfolio-accounting programs (Techfi, Advent, Centerpiece, dbCams, etc.) do the broker-dealer’s data downloads work?
This is obviously important if you currently use one of these systems or are thinking about purchasing one fo them.

What other marketing help and practice management assistance is available to me to build my practice? What are the costs?
This varies widely among firms. You should find a firm that has ancillary services in this regard which can help you leverage your time and build your business, including getting anew client leads.

How many employees are in the home office supporting the field? What is the ratio of support personnel to registered representatives? What is the level of expertise of these employees? How long have the employees been at the firm on average and what type of turnover have you experienced?
The answers to these questions may give you some idea of the type of relationship you can develop with home office personnel and what level of support you can expect to receive.

What is the average production of the broker-dealer’s representatives? What are their average assets under management? What is their mix of business?
The answers to these questions will give you some idea of the culture of the company and how important your business might be to the firm.

How does the broker-dealer’s compensation plan work?
Obviously, this varies widely with each firm, but you should get a good understanding of what services and support you get first, then compare payouts. The safest approach here is to furnish the firm with a copy of a production run from your current firm and ask them to do a pro forma on the same run of business. That way you can compare apples to apples. Percentages mean nothing unless you know what they are applied against. It’s also important to know about other benefit programs, transition money, retirement plans, health insurance, and equity opportunities. Are both fee-based and commission-based advisors supported? What percentage of the commission does the registered rep receive?

Please list all transaction costs, fees and other charges.
All of these items can have a big impact on your net income and need to be considered and compared when evaluating firm compensation.

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