3 questions to ask: do you have the right broker?

October 9, 2015

Trusting your money to someone else is not a light matter. Before you get a broker to grow your finances, you'll want to check these cues to make sure that you've got someone reliable and trustworthy.

3 questions to ask: do you have the right broker?

While you may be tempted to put your complete trust in your insurance broker, you need to make sure that he or she has your best interests at heart. Ask yourself these questions to be certain you've got the right one:

1. Have I researched him?

Get the low-down on your advisor, such as his registration status and the types of investment products he is registered to sell.

  • Any previous (and sometimes current) enforcement proceedings against him are public knowledge and easy to find.
  • First connect to www.csa-acvm.ca or call 514-864-9510 to find your provincial securities commission. They'll have the details.

2. Is he pushy?

One broker, who asked not to be named, said that you should start worrying if your broker is pushing a particular stock, especially one that has been in the dumps recently.

  • Unscrupulous brokerage houses sometimes engage in what's known as a pump-and-dump scheme: they highly recommend a stock to their customers, the price rises as those customers buy it up, and the brokers quickly sell their own shares of the stock behind the scenes, pocketing bucketloads of cash. It's ugly and it's illegal, but it happens.

3. Does he crow about his "hot tips"?

Keep this in mind next time your broker tells you about some "undiscovered gem" of a stock: it's almost certainly not "undiscovered."

  • The odds of any one stockbroker knowing something the rest of them don't know are between slim and none.
  • By the time the "secret" reaches you, chances are that the Bay Street highfliers have already made their move on the stock, leaving latecomers little chance of making a profit.

Stock-buying tip

Check the "free cash flow multiple"

Want to know the secret to picking successful stocks? The free cash flow multiple is a measure that top Wall Street analysts use when trying to determine the health of any one particular stock.

  • The number measures how much cash a company generates after it's finished paying its bills, including reinvesting capital back into its business.
  1. To figure out what a stock's free cash flow multiple is, do this: subtract a company's capital expenditures from its cash flow from operations. This information can easily be found on the face of a cash flow statement (which can be found on search engines or tons of other Internet financial sites). That's free cash flow.
  2. Next, divide that free cash flow figure by how many diluted shares the company has outstanding (also found on any number of financial websites). This will give you the free cash flow multiple.

You can feel pretty good about buying stock in a company at 12 times the current year's free cash flow, and very good at 10 times. The lower the multiple, the more attractive the company is.

  • Don't like to do math? Your broker should be able to get you the free cash flow multiple number very easily.
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