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 as being irrelevant or probing questions are actually required inquiries the broker must make before making any trades on your behalf.
Brokers don't ask investors for their personal information just to make conversation. There's a perfectly good reason behind it — they have to ask.
One of the reasons is for tax purposes. Since you need to report your capital gains, losses and dividends to the IRS, your broker must have your information in order to send you the required forms you'll need to file each year.
According to the Securities and Exchange Commission (SEC), there are three other reasons why brokers are required to ask for your personal information: suitability, record-keeping requirements and anti-terrorist/anti-money laundering laws.
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 suitable for your preferences and investment objectives. If the broker does not do that, he 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, the number of 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 legal action.
Rules set out by the SEC require brokers to maintain an up-to-date account of your personal information. The most important information 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 an effort was made to obtain and document the information.
Keep in mind 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. According to the SEC, the minimum requirements for this section include:
- Tax identification number or Social Security number for U.S. citizens and residents
- Date of birth
These requirements ensure that by requesting adequate information, the broker must be able to verify the client's identity. The client's personal information is cross-checked with any lists of known or suspected terrorists. These are requirements that arose out of the USA Patriot Act of 2001 which was passed shortly after the Sept. 11, 2001, terrorist attacks. It gives law enforcement broader power to investigate and prosecute terrorists while increasing penalties for those committing and supporting any terror activities.
It is conceivable that you could be misidentified or that you may have had your identity stolen. A check of your identity in such a case may reveal someone else engaged in money laundering. Before you 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.
The Financial Industry Regulatory Authority (FINRA) also has a list of other personal information your broker may ask when opening an account. While not required, it suggests you pass these details on so the firm can better serve your trading and investment needs:
- Contact person: You may be asked for the name, address and telephone number of a trusted contact person. This was added to most new account lists as of Feb. 5, 2018. FINRA states this is not a requirement, but only if you authorize the broker to disclose information in the event of financial exploitation against you.
- Type of account: In order to better suit your needs, the broker may ask whether you want to open a cash or a margin account. In a cash account, you will be required to make your own cash deposit so you can start making trades. In a margin account, you borrow from the broker and pay it back later.
- Uninvested cash: You may also be asked how you intend to deal with any cash you have on hand in your account. This includes any cash you deposit at regular intervals, dividends or interest on investments.
Online Brokerages and Trading Platforms
Some brokerages have traditional offices, which means you can give your information to someone over the phone or in person, so you know the details you share aren't necessarily at risk.
If you trade online without a middleman, you are still required to give up your personal information through the trading platform or app.
But before you do so, do your due diligence. Just as you would with any traditional broker, know who is getting your information. Read up on the brokerage's background, check out reviews and testimonials to see if it's legitimate. There are plenty of apps and online platforms — just like traditional firms — that aren't on the level.