Give Your Broker This 5-Part Test

EDITOR'S NOTE: This article is part of SmartMoney's annual broker survey special report. For more coverage, see "The SmartMoney 2009 Broker Survey," "Ranking the Full-Service Brokers," and "Should You Dump Your Broker."

The market’s recent swings have many investors raising a crucial question: Does their broker have what it takes to help them get through perilous times, whether it’s the quality of the advice or the clarity of their account statements? We asked analysts and consultants who follow the industry for the best ways to tell if your broker is right for you.

It’s not enough that top executives at big brokerage firms have been reaching out to investors with “Dear Client” letters. Some customers are demanding to hear directly from their broker — with good news or bad — at least once a month and even weekly during painful periods like last fall. When your broker does call, says David Lo of J.D. Power, he or she should spend enough time addressing three crucial points: your portfolio’s recent performance, its current asset allocation and a future investment strategy that works for you. For many investors, hearing from their broker during tough times is far more important than getting the easy call when everything is going right.

If you think your account statements are confusing, join the club. More than one-fifth of investors say their brokerage statements are difficult to understand — even more challenging than cell phone guides, according to a recent survey by consultants Siegel & Gale. Analysts say the best account statements include a simple summary with a snapshot of how the investor fared during the statement period, plus the total value of the account. The bigger and bolder the type, the better, according to Dalbar, a firm that analyzes brokerage statements. Raymond James added larger fonts and easier-to-read charts and graphs just over a year ago, and that helped the brokerage nail high marks in two recent studies comparing account statements.

Some customers say that when they wanted to pare back their stock holdings amid last fall’s market crash so they could move to less-risky investments, their brokers dragged their feet or even refused to shift strategies. While experts say a good broker is supposed to push back when he or she thinks a client is being rash, brokers ultimately need to know when to back down and follow directions from the person whose assets are at stake. Brokers may not like it, but these days many clients are more risk-averse than ever. If your broker seems keen on using a particular strategy, but you’re on the fence, try asking what he’s doing with his own investments.

When SmartMoney recently surveyed full-service clients to see what they valued most about their firm, they ranked professional guidance about investments at the top of their list — even above reasonable commissions and fees. Of course, good brokers ensure that their investors know exactly how a product works by using plain language and clarifying without any jargon. But they should also be able to invest their clients’ money in any number of products, “and not just the house brand,” says Bill Doyle, an industry analyst at Forrester Research. Sometimes that house brand comes with hefty sales charges.

Will your broker help you save a buck? When it comes to so-called managed accounts, it pays to negotiate. The difference between 1 percent and 1.25 percent may not seem like much, but cutting the annual fee by just a quarter of a percentage point can lead to big savings: $12,500 over the course of a decade on a $500,000 account. And while paying a set fee is typically a better choice in an account with frequent stock trading, buy-and-hold investors might save more money by paying a commission for each trade.