Tracy Stoneman - Stoneman Law
Has Been Quoted In:

Merrill Lynch vs. Prudential

No, this is not the latest headline grabbing lawsuit -- it is an illustration of the subject of this months article -- "Choosing a Brokerage Firm." Roughly one half of Americans who invest their money do it by choosing a brokerage firm first. The other half choose a stockbroker first. If you choose a brokerage firm first, rarely do you have much input on choosing the stockbroker who will be your contact and manage your account. Choosing a stockbroker, even in such a situation, will be the subject of next months article. On the other hand, if you choose or are referred to a particular stockbroker, your account will end up at whatever firm that employs that broker. Whatever it was that drew you to that broker should not impede your assessment of the brokerage firm. Whether you are choosing a brokerage firm for the first time or reassessing your current firm, consider the following.

Choosing a Brokerage Firm

With the historic bull market the United States continues to experience, there is a proliferation of brokerage firms. Is one brokerage firm better than another? The answer generally is yes, but the answer is dictated by your own criteria. If you are a highly sophisticated and experienced trader who wants to specialize in a specific area of the market, your needs are dramatically different from the average generalist investor. For example, if you are looking to trade government bonds in large blocks, you will want to deal with a firm like Bear Stearns that is one of the largest government bond traders. If you are an investor who wants to concentrate in a specific states municipal bonds, like Colorado, you might prefer a regional brokerage firm who specializes and underwrites Colorado tax free bonds.

The average investor would do best at a brokerage firm that offers the complete basket of investments, as opposed to a brokerage firm that concentrates its business in one specific area or type of investment. Be wary of the multitude of small to medium sized firms that specialize in certain "niche" areas of the market. For example, many firms concentrate in initial public offerings (IPOs) -- companies that are going public for the first time. The brokerage firm may have inextricable ties to these sometimes "fledgling" companies -- helping them raise the money needed to go public ("underwriting it"), selling the companys stock, making a market in the companies stock, and trading the companies stock in its own account. These brokerage firms tend to push IPOs to investors for whom this type of trading is unsuitable. IPOs are one of the more speculative ends of the investment markets. Not only are the risks higher, but so are the commissions and the profits for the broker and the brokerage firm -- thus, the incentives for firms to specialize in this area. You might even find an individual broker at a large brokerage firm who has concentrated his business in this type of trading. The dangers of the boutique or specialty firms are that, as an investor, you risk being pigeon-holed into the firms specialty and not necessarily what is best for you. This is a current problem today for many individuals.

Although referrals are valuable, they may not provide you with the information you need to know about the brokerage firm. Look for the brokerage firm that has a history of selling a large percentage of nonproprietary products, as opposed to proprietary products like mutual funds and limited partnerships which the brokerage firm itself has developed or sponsored. The firm and its brokers will push these particular products over other products, because the firm and the broker make more money on both the initial sales and in ongoing fees. Another key area of scrutiny is commissions. Choose a firm that has either discount or competitive commissions.

Choose a firm that has been in business more than 10 years. If you are dealing with a brokerage firm that is not nationally recognized or one for which you have no referrals, youll need to do some independent investigation. This is very difficult. Though the number of brokerage firms is constantly growing, many people dont realize that there are a number of brokerage firms that close their doors or change names on a fairly regular basis. Your best bet is to find someone who's in a brokerage firm other than at the firm you are considering and have them address such things as years in business, management, growth, areas of specialty, and commissions. One of the other items to explore is the brokerage firms track record as it relates to other customer complaints. The National Association of Securities Dealers (NASD) has a system for keeping track of customer complaints against individual brokers and brokerage firms. You can obtain this detailed information yourself by calling the NASD at 1-800-289-9999.

On a national level, there are clearly some firms that have established themselves as "problem" firms. The most notorious is Prudential Securities, which probably has defrauded investors of more money than any other brokerage firm. Prudential Securities closed its doors here in the Springs within the last year. Merrill Lynch, for its size, has one of the better records as far as numbers of customer complaints. When infractions are made in a clients account, it tends to settle, as opposed to forcing clients into litigation. Another firm that stands out is A.G. Edwards. Where so many firms have abused investors by concentrating them in unsuitable proprietary products, A.G. Edwards generally has stayed away from this area of the markets.

Keep in mind that bigger is not better. Prudential has effectively invalidated this idiom. Also, dont be too enamored with the "performance history" of a stock brokerage firm. Unless you are going to have someone "manage" your money (that is, give someone 100% discretion to make all buy/sell decisions in your account), performance history is mostly irrelevant. If you are looking for a money manager, as opposed to a stockbroker (the subject of an upcoming article), this is probably done better and at less cost at someplace other than a brokerage firm.

Contact Ms. Stoneman - Stoneman Law Offices - Texas & Colorado. (800) 783-0748 Free Consultation - Representing Clients Nationwide

Client Reviews
If you suspect securities or brokerage fraud against your hard-earned investments and need an advocate, call Tracy Pride Stoneman - NOW! I was a victim of churning, improper sale of unsuitable private placements, compliance violations, and more. I blamed myself at first and didn't think I had a case, but I was referred to Tracy after another lawyer balked, thinking all was lost. She took the emotion out of it, got down to the facts, made the case, and in hands-on fashion worked hard for the best result possible. She's an excellent communicator and the kind of experienced securities arbitration lawyer you need in your corner. Ms. Stoneman achieved a settlement for me that far exceeded expectations. She has my highest recommendation. Jeffrey B.
Tracy was a wonderful lawyer in my and my husband's huge case against Prudential Securities. She was relentless in going after the stockbroker and firm, determined to obtain all of the documents that helped our case and hurt theirs (that's why the firm didn't want to produce them!). No matter what curve ball the brokerage firm threw, Tracy came up with an angle to overcome it. My husband always commented how smart Tracy was in handling our case. Throughout it all, Tracy was extremely cheerful and easy to work with - unlike most lawyers I know! Carolyn W.
I think that you did a great job for the Tylers, and I believe you are one of the most organized and effective attorneys I have worked with. John B.