Opening a brokerage account might seem like a daunting task, but like most things, it pays to come prepared. Your brokerage firm will need a certain amount of information about you to comply with regulatory requirements and to provide you with the best service for your accounts.
In the first installment of our two-part series, we lay out the types of personal information you'll need to provide when you open a brokerage account.
New in 2018
As of February, when you open a brokerage account or update information related to an existing account, new regulations require your broker to make reasonable efforts to obtain the name and contact information for a designated trusted contact person. So don't be surprised if an investment professional asks you to identify trusted contacts on your accounts. Among other things, adding a trusted contact person to your account puts your broker in a better position to protect you from financial exploitation and keep your account safe.
Personal information to open a brokerage account
When you fill out a new account application -- also referred to as a new account form, account opening form, or something similar -- you must provide some personal information about yourself and your finances. Brokers use this information for several purposes, including to learn about you and your financial needs and to meet certain regulatory obligations.
It might take a little time to fill out the application, but it is important to answer the questions on the application accurately. Be sure to read the application, accompanying agreements, and other documents the brokerage firm gives you carefully -- and ask questions about anything you don't understand.
Here are five types of personal information you can expect to provide when you open a brokerage account.
1. Social Security or other tax identification number. The Securities and Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA) -- two organizations that regulate the securities industry and work to protect investors -- require brokerage firms to ask for this information for several reasons. Like banks, credit unions, and other financial institutions, brokerage firms must report the income you earn on your investments to the Internal Revenue Service (IRS). In addition, the USA PATRIOT Act of 2001 allows financial institutions to use your Social Security number to verify your identity when opening brokerage accounts. This helps firms ensure you are who you say you are and helps prevent money laundering and terrorist financing.
2. Driver's license or passport information, or information from other government-issued identification. This is another way for a brokerage firm to confirm your identity and contact information. It also helps your broker comply with its obligations under the USA PATRIOT Act.
3. Employment status and financial information such as your annual income and net worth. SEC and FINRA rules require that any investment recommendation to a client, such as you, be "suitable." That means brokers may only recommend an investment to you if they have a reasonable basis to believe that the investment is suitable for you and your unique situation, which can include your employment status and net worth. For example, a suitable investment for a young, high-income employed individual may not be suitable for a retiree living on a modest fixed income.
4. Your investment profile. To help ensure that customers receive suitable investment advice, brokerage firms and brokers are required to learn as much about your investment profile as possible before recommending a securities transaction or investment strategy. In addition to your employment status and financial information, they will likely ask questions about your investment objectives, which might include generating income or funding retirement. Your broker will also want to know about your liquidity needs -- how fast you may need to convert an investment to cash without taking a significant financial loss -- and your risk tolerance, which is your willingness to risk losing some or all of your original investment in exchange for greater potential returns.
5. Name a trusted contact person. Effective Feb. 5, 2018, new account forms may include a section asking you to provide information for a trusted contact person. Your broker might ask for this information in a conversation or via email. You should expect to be asked to provide the name, address, and telephone number(s) for a trusted contact person that your brokerage firm may contact about your account.
While you are not required to provide this information to open an account, it may be a good idea to do so. By choosing to provide this information, you are authorizing the firm to contact such person and disclose information about your account in certain circumstances, including to address possible financial exploitation and to confirm the specifics of your current contact information, health status, or the identity of any legal guardian, executor, trustee, or holder of a power of attorney. You also will receive a written disclosure from the firm that lays out these details.
Be accurate when you are providing the information requested on these forms and by your broker. Your broker will use the information to understand your financial needs. In addition, you are certifying that the information you've provided is accurate when you sign the new account application.
Check out your broker
If you haven't already done so, make sure you check out the background of your broker and brokerage firm before you open an account using FINRA's BrokerCheck. Although a history free from registration or licensing problems, disciplinary actions, or bankruptcies is no guarantee of the same in the future, checking out your broker and firm in advance can help you avoid problems.
Finally, make sure the phone numbers and addresses that your broker and brokerage firm give you as their contact information are consistent with those listed in BrokerCheck. Identity thieves have been known to steal the identities of legitimate brokers and brokerage firms to get your personal information!
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