Believe it or not, they still exist. Here's what you'll need to separate the credible from the crooked.

By Eleanor Laise
July 16, 2002

NO DOUBT YOU'VE heard the horror stories and wondered, "Could that happen to me?"

Unsuspecting investors lost millions of dollars when Frank Gruttadauria, a former Lehman Brothers and SG Cowen broker, allegedly misappropriated clients' money and falsified account statements. Then there's the client who entrusted his savings to broker Enrique Perusquia, formerly of Lehman Brothers and PaineWebber, only to have Perusquia invest the money in companies that gave the broker kickbacks. And what about the clients of former Raymond James broker Dennis Herula? The Securities and Exchange Commission says they lost millions thanks to Herula's involvement in a fraudulent high-yield trading program.

Your broker may not be a felon, but that doesn't guarantee he's a saint. Now that we've ranked the best and worst brokerage firms, we'll show you how to find an honest professional to handle your account a broker who cares about your financial future and can actually tell a blue chip from a potato chip. Be forewarned: It's no easy feat. Investors across the country are seeing their savings pulverized by suspect fees, half-baked stock recommendations and good, old-fashioned fraud. The National Association of Securities Dealers (NASD) the organization that handles investors' disputes with brokers-reports that new arbitration filings through the first quarter of 2002 are up 17% over last year.

And brokers will be the first to tell you about the shortcomings of some of their colleagues. "Maybe 10% of brokers are superior investment professionals," says T. Sheridan O'Keefe, president of the National Association of Investment Professionals. "Many of them are opportunists, just plain greedy and outright stupid."

Fortunately, you can avoid such ethically challenged brokers by doing your homework. Here are seven questions to ask your "professional" before you hand over your cash.

1. What skeletons are hiding in your closet?
Just think of the hours you spend hunting for a broker as a risk-free investment with potential for stellar returns. Sure, you could simply call a brokerage firm and let them assign you a broker. A better bet: Ask friends, family and the millionaire next door for recommendations. Once you have some names, find out how long each broker has been in the business and with his current firm. Look for someone with at least five years' experience. Finally, when you have a minimum of three candidates, meet with each one and ask them all to supply you with a list of clients you can call for references.

contact information is available at www.nasdr.com to get details on any disciplinary actions taken against him, his employment history, licensing status, even his scores on securities exams.

Should you discard any broker with the slightest hint of a checkered past? By all means, says NASD arbitrator Saul Nirenberg. "That's not fair, but I'm not interested in being fair. I want someone I can trust."

2. Will you return my calls?
One sign that a broker won't give you the time of day: He simply has too many clients. Nirenberg says a broker can handle up to 200 conservative clients but that number should be lower if he deals with active traders. And bear in mind: "A broker probably spends 5 or 10% of his time thinking about the market," Nirenberg says. "The rest of the time he's in meetings, calling clients and out foraging for new customers."

Billy Kirkpatrick got lucky. His Edward Jones broker, Susan Haag, checks in like clockwork. "I get calls from Susan at least once a month," says Kirkpatrick, a 31-year-old Cisco sales manager in Hendersonville, Tenn. Haag's secret weapon is Edward Jones's computerized contact management system, which lets her access client information at the touch of a button whether it's the client's portfolio or his children's birthdays. In Kirkpatrick's case, here's the payoff: When StorageNetworks went public two years ago, Haag knew Kirkpatrick, a high-tech aficionado, would be interested. With his okay, Haag put Kirkpatrick's name on the list for IPO access, bought the stock on its opening day of trading, and then, hours later, flipped the stock, securing nearly $10,000 in profits.

3. What's your investing style?
Brokers can't please all investors even some of the time. Your job: Find out each candidate's specialty stocks or mutual funds, active trading or buy-and-hold then make sure it matches your needs. As Nirenberg suggests, "Ask what asset allocation they would recommend, how much in bonds, how much in stocks, how much in speculative investments."

If only Doralise Comer's family had followed that advice. Last August, Comer, a customer-service representative in Cherry Hill, N.J., took over her retired parents' finances and was horrified by what she discovered. Their Merrill Lynch account had lost $148,000, thanks to investments in high-tech securities that most retirees wouldn't touch. Comer asked the broker for advice on how to stop the portfolio's free fall. She says he recommended that she buy Tyco. The stock has dropped more than 70% since Comer bought it last year. "I really received no guidance, no help," she says. "If anything, they just added to my stress." (A Merrill Lynch spokesman says that, although the firm doesn't comment on former clients' accounts, "we can say that we provided information and advice to this client. Unfortunately, the advice was not always followed.")

4. How do you get paid?
FYI: Those hefty commissions you pay your broker don't go straight to his Jaguar fund. The "payout" (the portion the broker pockets) is typically 30 to 50% the rest goes to the firm. "Brokerage firms have always used the payout to encourage certain types of behavior," says Danny Sarch, an executive recruiter who specializes in placing retail brokers.

Right now brokerage firms are pushing fee-based accounts, which charge a flat fee based on apercentage of your assets under management instead of commissions. These accounts produce steady cash flow for firms at a time when trading volumes have plummeted. To reward brokers who bring in fee-based business, firms boost their payout. "The payout could be fourpercentage points more to do fee-based business," says Mark Elzweig, a money management recruiter.

Brokers can also collect cash from sources outside the firm. Mutual funds sometimes give brokerage firms an incentive called a "full dealer reallowance" that lets the firm keep the portion of the fund's load that's usually sent back to the fund company. Your broker probably won't tell you about the kickback, but the deal must be disclosed in the fund's statement of additional information.

Bottom line: Your broker is paid for pushing certain products. The more you know about his pay package, the better you'll be able to distinguish between solid advice and shameless self-interest.

5. Can you cut me a deal?
Most major firms say their commission schedule is negotiable so investors willing to bargain are poised to save a bundle of cash.

And there's never been a better time to make a deal. Brokers are hurting for business, so they're doling out discounts you wouldn't normally get. What's a decent one? "Thirty or 40% off is fair," Nirenberg says. "If you're an active trader, the commission should be 15 to 20 cents a share, and if you're a very active trader, it should be 6 cents a share."

You might also consider a dual-rate scheme. Under this plan you'll pay full commission when an investment is your broker's idea, and you'll get a discount in some cases as much as 80%, according to O'Keefe when it's your idea. The deal not only saves you money, but also keeps the broker working for you.

6. Will you leave me for a larger client?
You may be feeling a bit neglected lately if you have a full-service brokerage account worth less than $100,000. Here's why: Your broker doesn't want your business anymore. "The mass market people with less than $100,000 to invest are going to be served by an 800 number," says Stephen Winks, a financial-services industry consultant in Richmond, Va. "They don't have enough assets to warrant personal advice."

Before you sign on with a brokerage, be sure to ask, "If I need assistance, whom will I be speaking to?" advises Bradley Skolnik, Indiana's securities commissioner. "Will I be working with the broker, or a call center located in another city?"

If you're transferred to a call center, don't just take your money and run. "The call center may be entirely adequate to meet the investor's needs," Skolnik says. Ask about the services offered and the training of the staff. At Merrill, for example, call center staff members have passed the Series 7 exam (a basic requirement to become a broker). And clients with at least $50,000 are assigned to a team of seven brokers who have various areas of expertise.

7. Can I read that contract again?
June Commagere was always too busy to read the quarterly statements from her Baton Rouge, La., broker. She had a number of investment accounts to keep track of. But last February, when Commagere began sorting through some old statements, she found that the fee on her brokerage account wasn't the 1.5% she claims her broker had promised it was 2.5%. To top it off, the account had lost $12,000 over the past 18 months. "I didn't know the fee had gone up, and he never told us," Commagere says. "We don't have lots of money. It was just a bad experience."

The lesson? Read everything. Twice. Skolnik tells investors to cross-check paper account information with online statements. "[A broker] can intercept your account statements or send them to a fictitious address, but information online is not something he can manipulate," he says, noting that most clients of Frank Gruttadauria didn't have online account access. (Skolnik gave congressional testimony concerning the case in May.) In fact, Skolnik suggests that an elderly female client may have helped end the charade by repeatedly demanding online account information. "He kept stalling," Skolnik says. "Eventually, he saw time was running out on him."

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