Some Investing Basics: Brokers, Planners, Funds

Polls repeatedly show that millions of people are uncertain how to get started with an investment plan.

The new year, just a few weeks away, is an opportunity for a new beginning. So, where do you start in planning for financial well-being? Probably the answer will include one or more of the following: a financial planner, a stockbroker, or a mutual-fund company. Here are some basic questions and answers about these three distinct groups.

How do I know if I need the help of a financial planner?

There's no easy answer. It depends partly on how comfortable you are doing your own research. Often people find it useful to consult a planner if they have substantial liquid assets - $50,000, $100,000, or more - or a complicated financial situation. For many people, books, articles, and investment-company literature provide enough background. For others, the cost of hiring a planner offers a big payback in avoiding costly mistakes.

What's the difference between a financial planner and a stockbroker?

Financial planners or advisers are consultants who help with total financial planning, including insurance and housing as well as investments. A broker is a person licensed to buy and sell securities and other financial instruments. Brokers also can make recommendations about specific investments. Sometimes, an adviser is also a licensed broker.

How do I choose a planner?

Talk with several - perhaps ones referred by friends or found in the Yellow Pages. Check their credentials as well as getting a feel for how well they understand your needs. To get names of a few planners in your area, call the Institute of Certified Financial Planners at 800-282-7526. In addition to the well-regarded CFPs, some financial-advice professionals have other accreditations.

How can I check a planner's record?

In most states, planners are registered. But registration filings are not as complete as they are for brokers. Call 888-237-6275 to see if a planner is registered with the Certified Financial Planners Board of Standards, the best-known certification group. The board will also know if complaints have been filed against the planner. Also, check on the planner with your state securities office. To get the number, call the North American Securities Administrators Association (NASAA) at (202)737-0900. Finally, ask the planner to give you a copy of his or her Form ADV, a two-part resume that provides educational background material, his or her fee structure, and a listing of any disciplinary actions taken against the planner.

What types of brokers are there?

A discount broker simply executes your buy and sell orders. Full-service brokers do this and offer advice. Deep or super-deep discounters give you extremely low prices on trades. Many are local or regional. Some have come under review by the US Securities and Exchange Commission and state regulators in recent years.

How do I find a broker?

Again, through referrals or by checking the phone directory. Most national investment houses have offices in major cities. Among the leading firms are Dean Witter, Merrill Lynch, and A.G. Edwards. Discount brokers include Charles Schwab, Quick & Reilly, and Fidelity Investments.

How do I check a broker's record?

With your state securities department (NASAA can give you the number) or with the National Association of Securities Dealers at 800-289-9999. Ask the broker for a copy of his or her Form BD - a resume that also lists any infractions.

How are brokers paid?

By commissions on trades. Full-service brokers charge more than discount ones.

Is a brokerage account insured?

Yes, usually. If the investment house goes under (as happened to Drexel Burnham Lambert in the 1980s), your account is covered. Amounts of this private insurance vary. Note that your account is not insured against trading losses, such as if you buy a stock that declines in value.

Where are stocks held?

Either in a "street account" (held by the brokerage firm in your account) or in your own name (you get a formal certificate from the company whose stock you buy). In the latter case, after the initial purchase by a broker, all dealings with the company issuing the stock must be undertaken by you. In a street account, your job is simpler. The investment house collects all quarterly dividends, for example.

What is a mutual fund?

With a mutual fund, you are buying shares in a pool of investments managed by a professional. Small investors who find buying individual stocks too risky can still invest in stocks through equity mutual funds. In picking a fund, you may want to ask: Do the fund's goals match yours - in terms of your time horizon, how aggressive it is, or how diversified it is? Are its annual fees low? Is there a "load" - an up-front sales charge or a back-end exit fee? Has it performed well?

Is money in a mutual fund insured?

Generally no, but if you hold it in a brokerage account, the account's insurance should cover you.

How do I buy into a fund?

You buy them through your employer's benefit plan, through a stockbroker or mutual-fund broker, or directly from a mutual-fund company. First get a prospectus and application form (by calling the fund's 800 number). You send a check or money order for either the minimum amount required by the fund or a larger amount of your choice.

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