INVESTMENT OUTLOOK : MANAGING THE NEW CHOICES : BROKERS : The Hunt for the Right Stockbroker : What to Look for, What to Avoid

No matter how much investors may complain about their brokers, the fact is investors need them.

Generally speaking, the Securities and Exchange Commission prohibits investors from buying shares directly from a company. Nor can investors simply wander onto the floor of the major exchanges to buy and sell stocks, bonds or other investments. These transactions must be made through a registered stockbroker.

That said, just how do you find and retain a reputable broker who will sell you what is appropriate for your portfolio, not necessarily his sales commissions? What do you look for, and what should you avoid?

Even more basic, what type of broker do you want: full service or discount? If you choose a discount broker, where will you get the investment information and advice that you need to manage your portfolio?

The choices are mind-boggling, and many individual investors are genuinely confused.

First, some definitions.

Brokers at full-service investment firms do far more than simply execute trades. These brokerage firms, which include such national giants as Merrill Lynch and regional firms such as Wedbush Morgan Securities in Southern California, offer extensive research and analysis of many of the thousands of publicly traded U.S. companies.

Researchers recommend which stocks their brokerage’s clients should buy or sell; they also analyze and offer advice on a myriad of other investment opportunities, from municipal bonds to commodities to limited partnerships. Brokers at these firms pass along this advice and additional investment information to customers.

For these services, the brokerage house charges a healthy commission on every transaction. These sales fees represent the primary source of a full-service broker’s income; unless customers buy and sell, brokers don’t eat.

Who needs full service brokers?

“People who don’t have the time, training and patience to do their own research,” says Mark Batetian, founder and president of Prudential-American Securties Inc. a one-office brokerage in Pasadena. “These people rely on their brokers to tell them what to buy, when to buy, and perhaps most importantly, when to sell.”

Until 1975, only full-service brokers were available, and their fees were set according to an industrywide schedule. But on May 1 of that year, fixed rates were abolished, paving the way for discount brokers.

Discount brokerages, which include the nationwide firms of Charles Schwab and Quick & Reilly, typically charge far less to buy or sell shares than their full-service counterparts. Their brokers are typically paid a monthly salary, plus, in some cases, bonuses based on customer service ratings and the sales performance of their office.

Discount brokers only place customers’ orders; they do not offer the investment advice and the buy and sell recommendations of their full-service counterparts.

“You don’t pay for what you don’t get,” says William Coppel, director of marketing for Quick & Reilly in New York. “You’re coming to us because you know what you want.”

How you arrive at that decision is of little interest to the discount broker executing your trade.

Many outside services and resources are available, but usually for a fee. In addition to such obvious sources as newspapers and magazines, you can subscribe to one or more corporate research services, such as Value Line or Standard & Poor’s. Subscription newsletters, available for investments ranging from commodities to mutual funds, are still another source.

Software publishers are also entering the market with computer programs capable of tracking your portfolio and linking you with electronic research services. One of the better-known programs is Charles Schwab’s Equalizer.

One of the most popular and reasonable sources of information on how to research stocks is published by the National Assn. of Investor Clubs. The group’s investors manual is available for $14 by writing to the association at P.O. Box 220, Royal Oak, Mich. 48067.

Investors deciding to use a discount brokerage typically use price and location to select the particular brokerage house at which to open an account.

However, selecting the right full-service broker is far more complicated. If you make a poor choice, you could wind up with someone who does not have your best interests at heart and views your business more as an opportunity to generate sales commissions for himself than to increase your net worth.

Basically, you should take the same care selecting your broker as you would your doctor, lawyer, accountant or any other professional whose advice you rely on.

References are important. So is the type of advice you receive. Listen carefully to what your broker tells you and determine whether it squares with your circumstances. Ask questions about the investment strategy your broker outlines for you. Read your account statements carefully and don’t hesitate to inquire about any activity in your account.

Finally, many brokers strongly recommend that you keep full control of your brokerage account and require your broker to consult with you about every trading decision. This type of arrangement is known as non-discretionary, which means that the broker does not have power to act on your behalf without consulting you.

Discretionary accounts allow the broker to trade on behalf of the client without seeking prior approval. “This only works well with the most seasoned brokers and only in limited cases,” says Thomas Hale, division manager of Wedbush Morgan Securities in Los Angeles. “We prefer to have our investors involved.”

Hiring a money manager is another way to hand over discretionary authority for your investments. Using their own research and analysis by others, they will make investment decisions and place the orders for your portfolio, mainly in equity and fixed-income securities. Although usually independent, money managers sometimes are affiliated with a brokerage house. Your broker, accountant or attorney can refer you.

But money managers aren’t for everyone. They typically require large initial investments, with few accepting less than $50,000. And their fees are based on a percentage of the assets they handle.

James Jacobs, a 59-year-old Tarzana film producer, now knows the wisdom of being an involved investor. About 10 years ago, he turned over responsibility for managing a $25,000 retirement account to his broker. Today, the account, which was invested primarily in oil stocks, contains $650 in cash and 1,500 unpriced shares in a bankrupt company.

Although his broker told him of his trades, Jacobs now realizes that the strategy the broker pursued was far too risky for retirement funds. “It’s like taking money to Las Vegas,” Jacobs says of his experience. “We could have won big, but it’s a gamble. We shouldn’t have done that with my retirement account.”