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Investment Choices
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If you don't have your own broker or are looking for a new one, the "Your Investment Team" brochure may be helpful to you. After you carefully select a brokerage firm and individual broker, seek references for both the brokerage firm and the individual broker before opening an account or making an investment. Get to know your broker as well as you can so that you're comfortable with the person handling your money... but keep an eye on your account yourself.
The broker you select will ask for information about your investment objectives and personal financial situation, including income, assets, and investment experience. Be honest. The broker will rely on this information to make appropriate investment recommendations.
To complete the new account agreement, you will need to make three critical decisions:
Decision 1: Who will control decision-making in the account?
You will control the investment decisions made in your account unless you decide to give discretionary authority to the broker to make investment decisions on your behalf. Discretionary authority allows a broker to make investment decisions based on what he or she believes to be best, without consulting you about the price, the type of security, the amount, when to buy or sell, and without providing you more than one report per year. Do not give discretionary authority to a broker without seriously considering whether this arrangement is appropriate.
Decision 2: How will you pay for the investment?
Most investors maintain a cash account that requires you to pay for each security purchase in full, at the time you buy it. An alternative type of account is a margin account. When you buy securities through a margin account, it means you borrow money from the brokerage firm to buy the securities and it requires you to pay interest on that loan. If you open a margin account, you will be required to sign a margin agreement disclosing the interest terms.
When you purchase securities on margin, the firm has authority to sell immediately any security in the account--without notice to you--to cover any shortfall resulting from a decline in the value of the securities. If the account value falls below the amount of the outstanding loan, even due to a one-day market drop, you will be liable for the balance. This is known as a margin call and may be a substantial amount of money.
Decision 3: What level of risk should you assume?
In a new account agreement, you will be asked to specify your overall investment objectives in terms of risk. Categories of risk may have labels such as "income," "growth," or "aggressive growth." You must be careful to understand the distinctions among these terms, and be certain that the risk level that you choose accurately reflects your investment goals. Later, you'll need to be sure that the investment products your broker recommends reflect the category of risk you selected.
Signing Documents
After deciding to open an account, there will likely be several documents for you to sign. Never sign a document without reading and fully understanding it. Ask questions. If the agent or broker cannot or will not explain a document or transaction, you may want to ask yourself if you have selected the right broker. Early precautions can prevent misunderstandings and problems later.
Many brokerage account agreements contain an arbitration clause requiring that any future disputes be resolved through arbitration rather than litigation. While arbitration is an effective, often advantageous, method of resolving a dispute, signing an agreement may mean that arbitration is the only forum other than mediation available to you--so consider this carefully before you sign. Even without signing an arbitration agreement, you would still have the right to seek arbitration of disputes as an option under most securities industry rules.
Keeping a File
There is no definitive list of documents that you must, or even should, keep. But, here are some suggestions:
Be certain to review all of these documents carefully for accuracy as soon as you receive them, especially if you receive them after the transaction, such as with statements and confirmations. Report any discrepancy to your brokerage firm immediately. If no action is taken, or if the action taken is not timely or satisfactory, consider taking additional steps toward resolving the dispute. Never allow your broker to mail statements and transaction confirmations to someone other than you (such as to him or herself or other family members). It's important that you have the opportunity to verify the accuracy of your own accounts.
By being practical and responsible about managing your investment relationships, you can often avoid serious problems later. |
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