Eight Questions to Ask When Hiring Your Stock Broker

Katusa's Investment Insights August 3, 2018 Eight Questions to Ask When Hiring Your Stock Broker By Marin Katusa My fund is one hundred percent focused on the commodity space. And I have tremendous experience dealing with many brokers from several different companies. Not only am I going to tell you the right questions to ask, but in the process, I will also explain why having a full-service broker is a good idea. We're going to walk through some of the things that you should be asking your broker if you have one. And if you don’t, maybe this will help you consider getting one in the future. So let’s get you started… Question 1 – Do you have experience in and access to Canadian listed stocks on both the TSX and TSX-V? The first thing you want to ask your broker, whether you already have one or if you’re shopping around, is whether or not he has market access. What I mean by that is access to the TSX Venture and the big board (the TSX). If you're Canadian, it's a lot easier. Just about everybody has access to these markets that I just listed. But if you're an American, it's actually much harder – and a lot of American brokerages do not have access to the TSX Venture. At Katusa Research we get emails all the time from subscribers saying, "I can't buy the stock because my brokerage house won't let me". And sometimes that's because they’re using a discount broker, or their current full-service broker doesn’t bother with the resource sector stocks listed on the Canadian exchanges. So the question you want to ask is: "Do you have direct access to buy on the TSX, and the TSX Venture in Canada?" Sometimes they'll say, "Oh yeah, we do". But what they're actually doing is they're buying the equivalent stock on the OTC bulletin board. It is not the same. The OTC board is not a primary listing and there's not nearly as much volume in most instances. In most cases, a market maker will notice the volume and create a spread resulting in you paying more for the Canadian stock then you should be paying if you had direct access to the Canadian listing. That's question number one: "Do you have direct Canadian market access?” Question 2 – What kind of deal flow do you have access to? This is the second reason you should have a full-service broker (in addition to a discount online broker). And the second question you should ask is: “What’s your access to Canadian resource deal flow like?” Why? Because a broker who has a lot of deal flow on junior resource deals usually means he is active and experienced in the Canadian junior resource markets. Deal flow is an important piece of how I have built my funds and personal holdings over the years. A lot of deal flow helps you see where the money is going and what's happening in the sector. The stockbroker you choose for Canadian resource stocks should have a solid grasp of the deal flow in the sector. He should know who is doing financings, who is buying new assets, and so on. This type of information won’t just be sent to you and every other client in a mass email chain. You need to ask for this information directly. Don’t be shy. Ask what current deals your broker is working on. Think of the broker as your employee. Question 3 – Do you have access to the right research reports? Research reports on the sector are one item that a lot of people forget about. If the broker says he has a lot of deals, then ask for his firm’s research reports on the deal flow he claims to have. There are over 1,000 companies in the mining sector alone. It's almost impossible to do due diligence on all of them. But if you have access to a brokerage house where a broker states he has great mining or energy deal flow then its only logical that the firm will have a team of in-house analysts like the team at Katusa Research (but not as good!) who are doing due diligence on all the mining companies out there. So, you can read their reports for free because your fees for the full-service brokerage include access to such reports. That's just part of the service that the broker offers. But you have to ask for that as well. It's not expensive and, once again, you don't have to be afraid just because you're not a big client. It's super simple for your broker to do, and it provides you with a lot of information from a brokerage firm’s perspective. Question 4 – How quickly can you execute my trades? Trading and execution is another important aspect of having a good full-service broker. What if you're not in front of the computer all the time - how are you going to execute a trade? Remember, these brokers work for you. You're their client so you want to inform them of things you want to be doing and companies you want to be buying. And they'll do it instantaneously for you. You don't have to go and log into your account and find a stock online and look up the ticker symbol. All you have to do is make a phone call or send an email. And that's what they're there for. If you think your brokerage account is too small to get personal service from your broker, just remind the broker that you are a subscriber to Katusa Research and it's only a matter of time before you become a big client. Question 5 – Do you provide active management such as trading alerts, limit targets, crosses, and insider buying/selling and Private Placements? Trading alerts are important. If you’re a busy professional or on vacation, you want a broker who is on the ball to keep you alerted to major movements in your portfolio. Things like… - Tax loss selling - you can ask them to identify targets for you. - Price Alerts - if a stock goes below a certain price, I want to buy it. Or if a stock hits a certain price, I want to sell it. Remember they're getting a percentage of this trade so they want to get you invested in the market. But you have to ask for it. Question 6 – Can you segregate my stock? Stock segregation is one issue that gets almost zero attention, and yet should really be closer to the forefront of your concerns. I actually went through this myself with Northern Dynasty last year. What stock segregation means is that your stock is actually put into an account where the brokerage firm cannot “lend” out your shares for a profit without asking you and paying you for the “loan” of your shares. The reason why this matters is because then your stock can't be borrowed without your permission and you will get paid if you choose to lend out your stock. That's what happened with Northern Dynasty. Brokerage houses were loaning out their stock to other people who were shorting the stock. Most clients had no clue this was happening. The brokerage firms were profiting from loaning out the clients shares without the client’s knowledge. But, the brokerage firms were not doing anything illegal. That’s because in the fine print, unless you have a segregated account and you request you shares never to be loaned out with your prior permission, the brokerage firm has every right to do so. You can be long a company and meanwhile, another trader is using your shares to suppress the price. Not cool. To avoid having someone borrowing your shares, you need to have your stock segregated. All you have to do is say: “Make sure my stock is segregated so it cannot be shorted.” Question 7 – Is your broker experienced in dealing with Private Placements and Warrants? If your broker isn't experienced with Private Placements, lifting legends off of restricted financings and exercising warrants, the hard truth is your broker isn’t up to par for the Canadian resource sector markets. Without a broker it's very difficult and time-consuming to exercise your warrants on your own at a discount broker—I wouldn’t even bother trying. When most people start out, they’ll think "I'll save the money and do it myself. It’s no problem. I can do it at my online account, etc...” It's a lot harder than it initially seems. There's a lot of paperwork and there's a lot of time involved in doing this. If you have an experienced resource broker, it's all done for you. And that's one of the big perks of having access to one. Question 8 – Are your fees negotiable? (Hint: They always are) Here are a couple of things that are happening in the brokerage industry. The big one that all retail investors should be looking at doing, whether you have a broker or not, is negotiating the cost of fees on a per trade basis. Ask the broker what his going rate is. Shop around to see what rates you can get. You can always get a better rate than the one offered. And if you know someone trying to find a full-service broker, send them these interview questions to help them narrow their search. Regards, Marin Copyright © 2018 Katusa Research, All rights reserved. If you wish to stop receiving our emails or change your subscription options, please [Manage Your Subscription]( Katusa Research, Suite 530 - 800 West Pender St, Vancouver, BC V6C2V6, Canada