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READY FOR DISCOUNT BROKERAGE? READ THIS BEFORE YOU SIGN If you’re planning to open a discount brokerage account, here is information that may help you avoid unpleasant surprises. Discount brokers (or dealers) are firms that act as intermediaries in securities trading. In other words, they are firms through which you can buy or sell stocks, bonds, mutual fund units, or other securities—but they will not provide any advice on the purchase or sale of these securities. Discount brokers must be registered with the Autorité des marchés financiers (AMF). Make sure your discount broker is registered with the Autorité des marchés financiers (AMF). Discount brokers carry out trade orders for lower fees; this is their main advantage. However, fees may vary from one discount brokerage to another, so be sure to confirm all the fees that will apply to your account, and compare them to the cost of doing business with a full service brokerage. Unlike discount brokerages, full service brokerages provide advice on the purchase or sale of securities. Since you won’t be receiving any advice about buying or selling securities, you’ll need to have a basic grasp of financial investing. For example, you should know how to read financial statements of companies whose shares you intend to buy. As well, you will need to establish your investment objectives and risk tolerance in order to be able to determine suitable products. Do you have the basic knowledge needed to make informed investment decisions? If you use a discount broker, you’ll need to spend time on researching investments that you own or want to purchase. You will constantly have to monitor information that might affect the value of your holdings. Whether your returns are positive or negative, this is quite important because you’re the one who will be making the final decision. Do you have enough time to research the investments you own or the securities you want to purchase? Information from discount brokers The information provided by discount brokers should be checked systematically before you buy or sell securities. For example, if a company is under reorganization, you’ll need to fully understand how this will affect its shares. Discount brokerage firms are not responsible for notifying investors or suspending trading of company shares in order to protect investors. Many discount brokers post information on investments and markets on their website. Just because information is posted on a brokerage company’s website, there’s no guarantee it’s correct or complete. Nor do discount brokers necessarily endorse the opinions they pass along. Consult a number of information sources before making a transaction. Check for the latest information before buying or selling securities. Proxy Authorizing a third party (proxy) to manage your discount brokerage account can have serious consequences. Before enlisting a proxy to manage your account—even someone who appears competent and trustworthy, a friend, a relative—be aware of the authority that you are granting to a proxy. Before you authorize a proxy to make transactions through your account, you should know that: • A proxy may give instructions to buy or sell your shares (buying on margin or selling short1 if your account allows such transactions). • Transactions carried out by a proxy will be made in your name, as if you had carried them out yourself. The broker will consider such transactions to have been approved by you. 1Selling short means selling shares you do not own. Short sellers expect shares to lose value and become available for purchase at attractive prices. This can be a very risky investment strategy. If you grant full authority over your account to a proxy, he/she may, in addition to buying or selling shares: • Withdraw money from your account. • Receive transaction statements, notices, and requests addressed to you. • Take action in your name on matters relating to your account. Be careful! • The broker will not keep you informed of actions taken by the proxy—it’s up to you to ensure supervision. • You will be fully responsible for the proxy’s transactions and actions. • You will need to reimburse costs incurred by the proxy, whether due to losses, errors, or negligence. If you have authorized short selling, amounts could be sizeable. Remember that any person who expects compensation in return for financial advice or service as an investment intermediary must be registered with the AMF. Have you fully assessed the consequences and the risks associated with assigning the management of your account to a proxy? Client agreements Client agreements are sometimes separate from account opening forms. Take the time to read your agreement, and be sure you understand it. Among other matters, it sets out what the broker can do if your account is short on funds. The discount broker may decide to sell your shares to cover amounts due. Your account agreement can also specify that your broker may accept or refuse a transaction order and that, in certain situations, the broker may debit your account and place a hold on funds. Signing the account opening form means you accept the conditions and responsibilities under the agreement. Make sure you understand the account opening form and the related account agreement. Are you familiar with your account agreement? With respect to Internet-based transactions, never share your password with anyone—you could be responsible for losses incurred as a result of access granted to your account. Even in the case of a friend, family member or professional colleague who appears to be trustworthy, granting access could lead to unfortunate consequences. For more information, see our brochure Watch Out for Securities Fraud. What should you do if you have a disagreement with your discount broker? When reviewing your account statement, you note that a transaction was made without your approval. Check the recent data on the securities in question. Was there an offer to buy the company? Did your discount broker, as per your service agreement, sell any shares to cover a shortfall in your account? Consult your account agreement again. Whatever the circumstance, call your discount broker for an explanation. If the problem isn’t resolved quickly, contact a manager, supervisor, or representative of the firm, preferably in writing. Some brokerage firms have an ombudsman or a dispute resolution officer who can review the matter. If the situation is not resolved, contact the AMF. You can ask for your complaint file to be transferred to the AMF. It will be analyzed and you will be offered assistance to settle the dispute. You may decide to retain legal counsel at any time during this process. For further information, see our brochure, Choosing a Securities Firm and Representative. INFORMATION CENTRE 418-525-0337 514-395-0337 Toll-free: 1 877-525-0337 www.lautorite.qc.ca November 2007 The Autorité des marchés financiers (AMF) is providing the above for information purposes only. The figures do not represent any particular fund. It does not give any advice on the purchase or use of any specific financial products or services.
