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Choosing a Broker - 11-23-2003

Question:

How do you go about choosing a broker?

Answer:

Whether you ultimately decide to go with a full service, discount, or electronic brokerage when choosing a broker you need consider more than just the commission price.

When considering a broker you should first consider the brokerage. Does the brokerage have a good reputation? Have there been problems with other clients that have not been resolved?

The NFA (http://www.nfa.futures.org) acts as the Better Business Bureau for brokerage firms trading in US markets and you can contact them to find out if there are any black marks on the record of the broker or brokerage you are considering using.

Secondly your broker should show proficiency for his craft. Some brokers specialize in one market and others have more general knowledge. Some can relate better to daytraders and others to position traders. Some love to do spreads; others are whizzes at option trades.

Whatever the case make sure they know what they are talking about, and that they will be able to help you with the types of trades you intend to do. In fact a good broker will try to find out what your trading style and objectives are, but either way, don’t be shy about asking questions from your prospective broker to make sure they know the subject of trading inside out.

Asking questions of your potential broker at this point should help you weed out the brokers from the “salesman”. Not all people who work at brokerages are brokers. Some are little more than salesman with little or no trading experience.

The main job of the salesman broker is to “churn you” which is a cryptic way of saying they try to get you to trade more often. After all, the more you trade, the more money you generate for the brokerage; however this strategy will usually have an inverse affect on your trading account.

Lastly you have to have a good report with your broker. You have to like them. You have to feel that they have our best interest at heart. Don’t lie to your broker. You should feel that you can ask them any question you want without feeling “dumb”. If the only trading education you’ve had is Ken Robert’s or Larry Williams, don’t try to hide it from your broker, chances are he can see you coming anyway. While your broker is technically your employee they should also be your “friend”.

One of the best analogies I heard for a broker is that they are like a golfer’s caddie. Ever wonder why all these professional golfers have caddies? Well, a good caddy does a lot more than just carry the player’s bag all afternoon. While the final decision is always the player’s, a good caddy will help the player develop their overall course strategy as well as helping with club selection, reading the greens, etc.

I’ve heard it said that if an amateur player had the assistance of a caddy they would immediately take 6-10 strokes off their game without doing anything else different. This is how much of a difference it can make to have an expert on your staff to help you choose the right clubs, read the greens, etc. A winning caddy is not cheap however. A good caddy typically earns 10% of the player’s winnings. Tiger Woods’ caddy is a millionaire.

Does this mean that brokers know where the market is heading next and you should subject your opinion to theirs? No, it does not. In fact I do not know of one good broker who pushes their opinion on their clients, but don’t ignore the help that a good broker can provide to you, especially if you are just starting out.

No matter whether you ultimately decide to trade with a full service, discount or on-line broker, take your time choosing a good broker/brokerage. While it does not guarantee success it is just one more thing that can help diminish the odds of failure.

Erich

PS. If you want me to point you in the right direction to finding a broker, just drop me a note and I’d be happy to send you the names of a couple of brokers who are both knowledgeable and have your best interest at heart.

-Erich

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