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.)

 

RELATED FAQS
  1. Can a Broker Sell Your Stocks Without Permission?

    In this article, find out if and when it's legal for a broker to sell securities from a customer's account and portfolio ... Read Answer >>
  2. Why Are Securities Held 'In Street Name'?

    Buying or selling securities through a broker means they're held in your broker's name. Read Answer >>
Related Articles
  1. Investing

    Brokerage Accounts, Explained

    Brokerages bring together customers or institutions and world financial markets. Here's everything to know about how they operate and what they do.
  2. Financial Advisor

    How Brokerage Fees Work

    What you need to know about fees when choosing between a full service and discount broker.
  3. Personal Finance

    Research Report Red Flags For Brokers

    Discover how to look past analysts' ratings to find winning stocks for your clients.
  4. Financial Advisor

    Investment Advisor Versus Broker: How They Compare

    What is the difference between an investment advisor and a broker?
  5. Trading

    How Forex Brokers Make Money

    Forex brokers set their prices based on commission, spread, or a combination of both. Traders have to be cautious in the thinly regulated forex market.
  6. Personal Finance

    Advantages And Disadvantages of Using a Mortgage Broker

    Mortgage brokers may be able to find you the loan of your dreams, but you should consider the potential downsides before hiring one.
  7. Investing

    Uncovering Hidden Broker Fees

    Even discount brokers can hit you with some fees that seem unnecessary; here are some to watch out for.
  8. Investing

    What Is a Broker-Dealer and Why Should You Care?

    Before deciding who to use for help with your investing, learn what brokers, dealers, and broker-dealers are and what services they provide.
  9. Financial Advisor

    How to Avoid Advisors Who've Been Disciplined

    It's not hard to find out if a potential financial planner has a shady past. Here's why it's so important to check an advisor's credentials and history.
RELATED TERMS
  1. Two Dollar Broker

    A two dollar broker is a floor broker who executes orders for ...
  2. Give Up

    Give up is a procedure in securities or commodities trading where ...
  3. Broker

    1. An individual or firm that charges a fee or commission for ...
  4. Business Broker

    A business broker is a company that assists in the purchase and ...
  5. Forex Broker

    A forex broker is a service firm that offers clients the ability ...
  6. Commission Broker

    A commission broker is an employee of a brokerage company who ...
Trading Center