Considerations Before Working With Investment Firms

Generally, every firm requires a client to sign a new account agreement before the client invests. You should carefully review the information contained in this document because it may affect your legal rights regarding your account.

LPL advisors will ask for information about your investment objectives and personal financial situation, including your income, net worth, and investment experience.

Important Considerations Before You Invest

Ask to see any account documentation prepared for you by the sales representative. Do not sign the new account agreement unless you thoroughly understand it and agree with the terms and conditions it imposes on you; in addition, do not rely on verbal representations from a sales representative that are not contained in the agreement.

LPL advisors will ask for information about your investment objectives and personal financial situation, including your income, net worth, and investment experience.

It is important that you answer these questions honestly, because advisors will use this information in making investment recommendations to you.

Completion of the new account agreement requires that you make three critical decisions:

1. Who will control decision making in your account?

You will control the investment decisions made in your account unless you decide to give discretionary authority to the advisor to make investment decisions for you.

At LPL, discretionary authority within an advisory account allows a third party to make investment decisions based on what they believe is best—without consulting you about the price, the type of security, the amount, or when to buy or sell.

Do not give discretionary authority to anyone without seriously considering whether this arrangement is appropriate for you.

2. How will you pay for your investment?

Most investors maintain a cash account that requires payment in full for each security purchase. An alternative type of account is a margin account. Buying securities through a margin account means that you can borrow money from the brokerage firm to buy securities; this arrangement requires that you pay interest on that loan. You will be required to sign a margin agreement disclosing interest terms.

If you purchase securities on margin (by borrowing money from the brokerage firm), the firm has authority to immediately sell any security in your account, without notice to you, to cover any shortfall resulting from a decline in the value of your securities.

If the value of your account is less than the amount of the outstanding loan—even due to a one-day market drop—you are liable for the balance. This balance may be a substantial amount of money even after your securities are sold.

The margin account agreement generally provides that the securities in your margin account may be lent out by the brokerage firm at any time, without notice or compensation to you.

3. How much risk should you assume?

In a new account agreement, you must specify your overall investment objective in terms of risk. Be sure that you understand the distinctions between the terms, and be certain that the risk level you choose accurately reflects your investment goals. Read more about investment objectives.

This brings you to an important investment decision: never invest in a product you don’t fully understand. You may wish to consult additional information sources such as business and financial publications; information about the fundamentals of investing and basic financial terminology can be found at your local library.

You should also ask your advisor for the product prospectus, offering circular, or most recent annual report, as well as the options disclosure document, if you are investing in options.

Read these materials carefully and, if you have questions, talk with your advisor before investing.

Nobody invests to lose money. However, investments always entail some degree of risk. Be aware that:

  • The higher the expected rate of return, the greater the risk. Depending on market developments, you could lose some or all of your initial investment. 
  • Some investments cannot easily be sold or converted to cash. Check to see if there is a penalty or charge if you must sell an investment quickly or before its maturity date.
  • Investments in securities issued by a company with little or no operating history or published information may involve greater risk. 
  • Securities investments, including mutual funds, are not federally insured against a loss in market value. 
  • Securities you own may be subject to tender offers, mergers, reorganizations, or third-party actions that can affect the value of your ownership interest. Pay careful attention to public announcements and information sent to you about such transactions; they involve complex investment decisions. Be sure you fully understand the terms of any offer to exchange or sell your shares before you act. In some cases, such as partial or two-tier tender offers, failure to act can have detrimental effects on your investment. 
  • The past success of a particular investment is no guarantee of future performance.
  • Although capital markets are carefully regulated, market reaction to events and news are part of the normal course of a trading day. Clients should be familiar with what may occur during periods in which markets are more volatile. Read more about market volatility.