A:

When you contact a broker, you may be surprised to find yourself answering questions you consider personal or private. The broker is not being nosy—he's just complying with the law. What may seem to you like irrelevant or probing questions are actually required inquiries the broker must make before making any trades on your behalf.

According to the Securities and Exchange Commission (SEC), there are three main reasons why a broker will ask for personal information: suitability, record-keeping requirements and anti-terrorist/anti-money laundering laws.

Suitability

Suitability refers to how your financial situation matches the advice and recommendations that are given to you by your broker. The suitability requirement comes from the self-regulatory organizations that regulate brokers. By understanding your personal financial situation, the broker must only provide you with recommendations that are suitable for your preferences and investment objectives. If the broker does not do that, they will be violating rules laid out by the National Association of Securities Dealers.

This includes your risk tolerance, your financial goals, the amount of debt you owe, your years to retirement, and your current net worth. A good broker will tailor advice to your particular situation. There is a case to be made that if a broker advises you to take an action in direct contradiction of your financial goals and circumstances, you might have grounds for a legal action.

Record Keeping

Rules set out by the SEC require brokers to maintain an up-to-date account of your personal information. The most important information that the broker must have is the client name, Social Security number, net worth and account investment objectives. If the client refuses to provide such information, the broker is excused from following the rule, however he must be able to prove that an effort must have been made to retrieve the information.

Note that some of this information may change. It is the investor’s responsibility to volunteer information to update the record, though a responsible broker may ask for updates on an annual basis. Address changes may be of particular importance, because the investor will receive a prospectus and other investment information by mail for each investment instrument.

Terrorism and Money Laundering

Finally, the broker must provide client information to meet anti-money-laundering and anti-terrorist requirements. These requirements ensure that by requesting adequate information the broker must be able to verify their client's identity. The client's personal information is cross-checked with any lists of known or suspected terrorists. These are requirements that have arisen out of the USA Patriot Act of 2001.

It is conceivable that you could be misidentified, or that you could have had your identity stolen. A check of your identity in such a case might reveal that someone else had engaged in money laundering. Before you go to see a broker, check your credit report for any unusual activity. You can also contact services that look to see if your Social Security number is being used. Rectify any problems before seeing a broker.

The Bottom Line

Personal finance is just that, personal. You must reveal information to a broker that you might not reveal to anyone else so that you can qualify for the trades that broker may make on your behalf. Don’t rely completely on the broker to stick to your objectives and risk tolerances. Be vocal when an investment seems to be outside of your comfort zone. (See also: Brokers and Online Trading, Shopping For A Financial Advisor and Tips For Resolving Disputes With Your Financial Advisor.)

 

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