Capital market: Investors should evaluate brokers

After  identifying the best broker, embark on evaluating his work, and ensure you get the best service out of the professional payments you make.

After  identifying the best broker, embark on evaluating his work, and ensure you get the best service out of the professional payments you make.

Many investors enter into a relationship with their brokers with little or no knowledge about the brokers’ background, such as time in the business, expertise or ability to manage money. Investors also are often in the dark when it comes to particulars of the firms they are dealing with. Please, this is a mistake. Well-informed investors ask the right questions and are able to communicate their needs to a broker more effectively. Perhaps more importantly, they will also be able to ensure that they aren’t being taken advantage of, particularly when it comes to commission charges.

Are you getting the best service?

Just as it is a good idea to periodically review your portfolio balance and asset allocations, it’s always a good to periodically evaluate what type of advice and service your broker is giving you, and if he or she is helping you achieve your financial goals.

Does your broker consistently suggest bonds that are outside your stated investment preferences? For example, if you have told your broker that you prefer government Treasuries, does he or she routinely pitch you on high-yield issues instead? Are you satisfied with your portfolio’s performance? Does your broker keep you informed on market influences and possible alternative bond investments given your financial objectives?

When your broker advises you to buy, sell or hold a particular bond, does he or she explain why? You should always know how a recommendation fits into your personal financial plan.


Investors buy and sell bonds through financial professionals who get compensated for their services.

This professional will typically be a broker working for a brokerage firm. Many but not all brokerage firms are also dealers, or broker-dealers, meaning they buy and sell securities from each other and hold some of these securities in inventory.

Mark-ups and markdowns

Broker-dealers, who hold bonds in inventory, increase or "mark up" the price when a customer buys a bond from them, and reduce or "mark down" the price when a customer sells a bond back to them. Like any other commodity, this mark-up or markdown is built into the customer’s price rather than identified separately.


Brokers who are not also dealers or who do not have the particular bond you want in inventory will have to go into the marketplace to get it. In this case, the broker acts as an agent rather than as a principal, and the trade is sometimes called an agency transaction. In most cases, brokers will charge investors commissions on agency transactions and the amount of the commission will be identified on the trade confirmation. (Remember, though, the agency broker also pays a mark-up to the dealer selling the bond.) Sometimes the commission will be based on a percentage of the bond’s price, and this percentage may decline as the size of the transaction increases. Other times, especially in the case of a discount or on-line broker, the commission may be a flat fee.

Keep in mind that the mark-up or commission is the fee imposed by the brokerage firm; the individual broker you work with will get a portion of that amount.

Negotiate please

Commissions are negotiable. Remember, with the abundance of discount brokers and stock research information available, your broker needs to be competitive when it comes to commissions.

A stockbroker who carries out buy and sells orders at a reduced commission compared to a full-service broker, but provides no investment advice. However, it is important to remember that discount brokers don’t provide personalized advice. Because of discount brokers, nearly anybody can afford to invest in the market. For those who wish to do their own research or don’t want to invest a lot of money, a discount broker is an excellent way to invest.

Suggest tying your commissions to the broker’s performance. Most good brokers will at least be receptive to this suggestion. Of course, you should remember that you also often get what you pay for.


Remind your broker that you are benchmarking his or her performance against other major indexes. You will not fail to get their attention.

Benchmarking is a standard against which the performance of a security, investment manager can be measured. When evaluating the performance of any investment, it’s important to compare it against an appropriate benchmark.

Be informed

Letting your broker or advisor know that you have done your homework, that you are expecting them to perform, and that you are ready, willing and able to detail your financial goals in a clear manner will make your relationship more productive. It will also put the advisor on notice that you are a savvy investor who cannot be taken advantage of.

Finally, do not sit behind to watch your advisor-broker do business without your participation; they may take advantage of your ignorance, you won’t be excused. The bottom line is that you want the best price, and the broker you work with deserves to be compensated. To get the best price, you may have to shop around. Or you may decide that the service you receive from your broker is worth a higher price. If you build a relationship with a particular broker, you may also find that your transaction costs can be negotiated.

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