Originally created 04/24/98

Knowledge of brokers needed for elderly

WASHINGTON -- While most older investors know stockbrokers are paid in commissions, they have a fairly limited understanding of the details of brokers' compensation and how that could affect the advice they get, a survey released Thursday suggests.

The American Association of Retired Persons, which commissioned the survey, warned that older investors' lack of knowledge may leave them unaware of potential conflicts of interest that could make brokers work against them.

Women age 50 or older in particular "have serious gaps in their understanding of the (broker) compensation system," said the study based on interviews with 827 people in that age group who have securities investments.

The survey came a few days after Arthur Levitt Jr., chairman of the Securities and Exchange Commission, threatened to clamp down on broker pay practices -- such as higher commissions for higher-risk investments -- that can create conflicts of interest.

Mr. Levitt said he was aware of only one brokerage firm that, as a result of the SEC's jawboning, adopted and stuck to a ban on so-called up-front bonuses, used to lure high-producing brokers from competing firms.

Among the findings of the AARP survey:

About one in three older investors (36 percent) know that higher-risk investments often carry higher commissions for brokers selling them.

More than a third (39 percent) do not know that their initial investment is reduced by the amount of the broker's commission. Nearly half the women investors polled (47 percent) did not know this, compared with 33 percent of the men.

More than a third (37 percent) do not know that the term "load" refers to a sales charge. For the women it was 53 percent, for the men, 25 percent.

Nearly half (48 percent) do not know that the amount of commission a customer pays is negotiable. More than six in 10 women investors (61 percent) did not know, compared with 39 percent of the men.

One-third (33 percent) do not know some firms use contests to promote the sale of a particular investment product within a specified period. For women investors, that jumped to 40 percent; for the men, it was 27 percent.

The National Association of Securities Dealers, a self-regulatory group, has submitted a proposal to the SEC recommending, among other things, that sales contests for brokers be curtailed.

Tips on brokers

Tips from the American Association of Retired Persons:

  • Recognize that your broker is a salesman and that brokers make money even if you don't.
  • Always know what you are paying for your investments.Read and understand your transaction confirmation slips.
  • Read and understand your account statements.
  • Consider alternative broker compensation arrangements.
  • Check out your broker's record through the National Association of Securities Dealers or your state's securities agency.
  • The NASD has a public disclosure line at (800) 289-9999. For the number of your state agency, call the North American Securities Administrators Association at (888) 84-NASAA.


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