Opening up a brokerage account for the first time seems like a daunting task. Many people open up a brokerage account for various reasons, you may wish to invest for your retirement or a child’s education, or simply to try to grow some cash you have set aside. This publication explains what to expect if you do decide to open a brokerage account, including what information you will be asked to provide, what decisions you will be asked to make, what questions you should ask your broker and what your rights are as a customer of a brokerage firm.
Information You’ll Be Asked to Provide
When you decide to open an account, there will be paperwork to complete. This will include a new account application, which brokerage firms may also call a new account form, account opening form or something similar. This application form will require you to provide some information about yourself, as well as ask you to make certain decisions about your account. As explained in more detail below, brokers use this information for several purposes, including learning about you and your financial needs and meeting certain regulatory obligations. While it may take a little time to fill out the application, it is important to answer the questions on the application accurately. So, be sure to read the application and the accompanying agreements and other documents the brokerage firm gives you carefully — and ask questions about anything you don’t understand.
In a new account application, along with other information, you’ll likely be asked to provide your:
- Social Security or other tax identification number: The rules of the Securities and Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA)—which regulate the securities industry—require brokerage firms to ask for this information for several reasons. Like banks, credit unions and other financial institutions, brokerage firms must report to the Internal Revenue Service the income you earn on your investments. In addition, under the USA PATRIOT Act of 2001, financial institutions may use your Social Security number to verify your identity when opening brokerage accounts in order to help prevent money laundering and terrorist financing.
- Driver’s license or passport information, or information from other government-issued identification: This, too, can help your broker comply with its obligations under the USA PATRIOT Act.
- Employment status, financial information—such as your annual income and net worth—and investment objectives: Collecting this information helps your broker to fulfill regulatory obligations. For example, if your broker is recommending investments to you, SEC and FINRA rules require that your broker collect this information. In addition, the information can help your broker determine suitable investment recommendations for you.Note that the terms used to describe investment objectives often vary across brokerage firms and new account applications. You might hear terms such as “income,” “growth,” “conservative,” “moderate,” “aggressive” and “speculative.” If you don’t understand the distinctions among the terms, ask your broker to explain or give examples. Make sure that you describe your financial goals, your willingness to tolerate investment risk and when you expect to need the funds in your account as accurately as possible.
Be accurate when you are providing the information requested on these forms. Your broker will use the information to understand your financial needs and to meet certain regulatory obligations. In addition, you are certifying that the information you’ve provided is accurate when you sign the new account application.
Decisions You’ll Be Asked to Make
The new account form will also ask you to make some important decisions about your account, including how you will pay for your transactions, how any uninvested cash will be managed and who will have control over your account.
- Do you want a cash account or margin loan account? Most brokerage firms offer at least two types of accounts—a cash account and a margin loan account (customarily known as a “margin account”). In a cash account, you must pay for your securities in full at the time of purchase. In a margin loan account, although you must eventually pay for your securities in full, your broker can lend you funds at the time of purchase, with the securities in your portfolio serving as collateral for the loan. This is called buying securities “on margin.” The shortfall between the purchase price and the amount of money you put in is a loan from the brokerage firm, and you will incur interest costs, just as with any other loan.There are risks that arise from purchasing securities on margin that do not come with most other types of loans. For example if the value of your securities declines significantly, you may be subject to a “margin call.” This means that the brokerage firm can either (1) require you to deposit cash or securities to your account immediately, or (2) sell any of the securities in your account to cover any shortfall—without informing you in advance of the sale.The brokerage firm decides which of your securities to sell. Even if the firm gives you notice that you have a certain number of days to cover the shortfall, the firm still may sell your securities before that timeframe expires. Also, the firm may change, at any time, the threshold at which customers can be subject to a margin call.Be sure to read carefully your new account application and any other documents that your broker gives you about margin loan accounts. Be sure that you understand how these accounts work before you sign up for one. With some firms, you sign up for a margin loan account by default unless you indicate otherwise on the application. If you have opened a margin account, but you pay for your securities in full at the time of purchase, you incur no more risks than you would in a cash account. For more information about margin loan accounts, read FINRA’s Investor Alert, Investing with Borrowed Funds: No “Margin” for Error.
Note: While margin loan agreements are typically used to allow investors to buy securities on margin, some firms allow their customers to take out loans for other purposes. In connection with these loans, a firm might ask the customer to sign a margin agreement. Before you borrow money from your brokerage firm-for any reason-be sure you fully understand the terms, costs and consequences.
- How do you want to manage your uninvested cash? Sometimes there is cash in your account that hasn’t been invested. For example, you may have just deposited money into your account without giving instructions on how to invest it, or you may have received cash dividends or interest. Your brokerage firm typically will automatically place—or “sweep”—that cash into a cash management program (customarily known as a “cash sweep” program).On your new account application, your brokerage firm may ask you to select a cash management program. Cash management programs offer different benefits and risks, including different interest rates and insurance coverage. Be sure you understand the different features of the cash management programs that your firm offers so that you can make an informed decision if you are asked to choose one.
- Who will make the final decisions for your account? You will have final say on investment decisions in your account unless you give “discretionary authority” in writing to another person, such as your financial professional. With discretionary authority, this person may invest your money without consulting you about the price, amount or type of security or the timing of the trades that are placed for your account.Some firms allow you to indicate who has discretionary authority over the account directly on the new account application, while others require separate documentation. There may be other types of authority that you may provide over your account, including a power of attorney and authorized trading privileges. Make sure you think through the risks involved in allowing someone else to make decisions about your money.
Other Account Opening Documents
The new account application may come with other documents-such as a “Customer Agreement,” “Terms and Conditions” or the like. These documents, along with applicable state and federal laws plus SEC and FINRA rules, govern your brokerage relationship. Make sure to ask for copies if you do not receive them and download or print out copies of these for your records if you conduct business with your brokerage firm online.
Be sure to take time to review carefully all the information in these documents, whether you are opening your account in person at your broker’s office or filling out your forms at home or online. And do not sign them unless you thoroughly understand and agree with the terms and conditions they impose on you.
Check Out Your Broker
If you haven’t already done so, make sure you check out the background of your broker and brokerage firm before you open an account with them. Although a history free from registration or licensing problems, disciplinary actions or bankruptcies is no guarantee of the same in the future, checking out your broker and firm in advance can help you avoid problems. Look up your broker and firm on FINRA Brokercheck by going to www.finra.org/Brokercheck or by calling toll-free (800) 289-9999.
Also make sure that the phone numbers and addresses that your broker and brokerage firm give you as their contact information are consistent with those listed in Brokercheck. Identity thieves have been known to steal the identities of legitimate brokers and brokerage firms so that they can get at your personal information!
Questions to Ask
Asking questions will help you to invest wisely and avoid problems. No matter what your level of investing experience, don’t be shy or intimidated—it’s your money. Here’s a list to get you started.
- Is this a margin account or a cash account? Can you explain the differences between the two?
- What choices do I have regarding cash sweep programs? What are the different features, including interest rates and federal insurance coverage? If the firm offers both bank deposits and money market funds, what are the advantages and disadvantages of selecting one over the other?
- Who will control decision-making in my account?
- How often will I get account statements? Who will provide the statements and will they be online or in paper?
Tip: The brokerage firm that you open an account with may not be the one that sends your account statements. You may open an account with an introducing firm, which makes recommendations, takes and executes your orders and has an arrangement with a clearing and carrying firm, which is the one to finalize (“settle” or “clear”) your trades and hold your funds or securities. There are also firms that take and execute orders and settle trades. If you work with an introducing firm, you may receive statements from the clearing firm. Find out what type of firm you open an account with and who will send you the account statements. You will receive an account statement at least once every calendar quarter.
- Will my securities be registered in my name, or in the name of the firm? Can you explain the differences between the two?
Tip: Whether the securities are registered in your name or in the name of the brokerage firm can affect how soon you receive your dividends and interest, the ease with which you can sell your securities and the types of communications you receive directly from the issuer of the securities, among other things. For more information, see “Holding Your Securities—Get the Facts” on the SEC’s Web site at http://www.sec.gov/investor/pubs/holdsec.htm.
- What are all the fees relating to this account? How much are commissions? Are there any other transaction or advisory fees? Fees for not maintaining a minimum balance? Account maintenance, account transfer, account inactivity, wire transfer fees or any other fees?
- What services am I getting with this account?
- Who do I contact if I have a question or concern regarding my account? What are the different ways I can contact my account representative or his or her manager? Phone? Email? Local branch office?
As You Monitor Your Account
After you open your account, you should monitor its activity regularly. Make sure that you review all of your account statements and trade confirmations for any errors or any transactions that you did not authorize. If you see any evidence of unauthorized trading or errors, notify your broker, broker’s supervisor or brokerage firm’s compliance department immediately to further protect your rights. Make sure to take notes of any conversations you have with your firm concerning such disputes, to send in your complaints in writing as well and to keep copies of these notes and all communications related to such disputes for your records.
Ask yourself whether your investments are meeting your expectations and goals and whether your goals have changed. Do your investments still appear to be right for you, and what criteria will you use to decide when to sell?
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