Dow Jones 9114.06 +63.24 10:20 am PST, July 18, 2003  NASDAQ 1699.67 +1.65 For info, visit access.smallcapnetwork.com S & P 500 986.04 +4.31 To be removed, please click here Russell 2000 462.26 +2.33 VOLUME 03: ISSUE 38  Broker or Client: Who's the Boss? Lots of mail on our piece How to Find a Good Broker. A couple of caveats: we have nothing against Merrill Lynch, and this series is for investors who need help with their 'safe' money. For those who are adept in the small cap arena, we would strongly suggest you consider a discount or online broker for those trades. No sense in paying a full service advisor and paying for information you don't need or want.  That said, as the market improves, you might decide to seek out some of the broad range of services a traditional broker may provide. There's no reason that you can't have two accounts--one for your core portfolio and one for those nifty ideas you unearth for yourself. At the conclusion of our last article, we were about to interview brokers recommended by a full service investment dealer's office manager. Some general rules of engagement: If, at any time, you're not comfortable, or find that the advisor is at odds with your investment philosophy, walk. As we've said, there are too many good, competent brokers out there to settle for second best. Make notes. Become familiar with the firm and, by extension, the advisor's policies. Learn about charges, timelines and possible pitfalls. View the advisor as your employee. Too many investors are intimidated by the 'broker aura'. Don't be. Advisors need your business more than you need them. Get references of some of his/her clients in situations similar to yours. Establish a commission discount policy for your trades, if appropriate. Understand how your orders will be executed and confirmed and whether the advisor uses stop losses. Does s(he) listen. The preceding may seem obvious, but it's amazing how people throw money--sometimes millions of dollars-- at brokers with little or no due diligence. Money and sex are the two most difficult things to talk about. Get over it. And I guarantee that you won't have to talk about sex with a broker. Unless you want to. In which case, you're on your own. I ask, therefore I'll know. The most important thing you can discern from an advisor is his/her trading philosophy. Brokers work on the principle of the 'velocity' of money. If their 'book' isn't turning over, they don't make money. There is a quick ratio you can get--or should-- from a broker. It goes by many names including 'style ratio'. This indicator is derived from dividing annual commissions by the size of the advisor's client asset book. For example: if an advisor oversees client assets of $25 million and consistently generates commissions of $250,000, the style ratio is 1 percent. This connotes an advisor who has a low turnover and likely holds stocks or other assets for clients on a long-term basis. If that same broker generates $1 million of commissions on the same book of business, the style ratio is 4 percent and likely trades frequently. If the number is over about 1.5 percent, unless you plan to be a heavy trader, look elsewhere. A high style ratio doesn't necessarily mean the broker is a churner--one who trades clients too often merely to generate commission. The ratio may merely be a reflection of the advisor's clientele, which may be comprised, of frequent traders. If that's not for you, move on. Brokers may be hesitant to give out their style ratio, but best to insist. And not just for one year. A style ratio over a number of years will give you a snapshot of who you're dealing with. While not definitive, it could save you a lot of time. As a matter of fact, you should be able to get the number from the manager. You might want to even take the initiative and make one of your conditions that the advisors recommended have low style ratios. As I said, the ratio goes by many names, but the math is easy and very telling. I have known brokers with ratios from below one to all the way into the double digits. Like me, like my philosophy. It seems obvious to find an advisor that shares your investment philosophy and risk orientation. Ask them what types of investments they make for their own accounts. Do they buy the same investments they recommend for clients? Do they invest in the market at all? A broker who is too heavily in the market might be distracted, while one who only invests in say, antique Chinese snuff bottles, may be out of touch. Most important is to discuss contact. How often can you expect to be contacted? How accessible is the advisor? If you're going to end up speaking almost exclusively to an assistant, perhaps you should interview the assistant. Structure a contact system that you can both live with. Also, meet the assistant, as s (he) will be your administrative contact. Don't waste your time, or the advisor's, with account details. The times when the two of you speak should be used for strategy, portfolio construction and decisions. Want a friend? Get a dog. In conclusion, you don't have to like the individual broker you choose, but it helps. Don't use a relative, friend or brother-in-law. This is serious business and if there are problems, you don't want to be in the uncomfortable position of being across a Thanksgiving turkey. Keep the two aspects of your life separate.  Now that you have conducted your interviews, go home, speak to friends and peers and wait a few days to make a decision. Review your notes and don't be afraid to call any of the players with questions or concerns. The better the due diligence, the less likelihood that there will be unpleasantness down the road. And you will have established yourself in the eyes of the firm as a serious, prepared investor.  Any good relationship takes work. Make sure it's on your terms. You are the client and it's your money. Make sure no one ever forgets that. Got questions or comments? Send 'em here: editor@smallcapnetwork.com     Unsubscribe Here D I S C L A I M E R : The SmallCap Digest is an independent electronic publication committed to providing our readers with factual information on selected  publicly traded companies. SmallCap Digest is not a registered investment advisor or broker-dealer. 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