Investing in Cannabis: Brokers and Advisors

Whether you decide to place your cannabis investment buy-or-sell orders through a full-service broker or financial advisor, or through an online discount broker, do your research to ensure that the person or firm is competent, reputable, trustworthy, and reliable. Know what to look for in a broker and an advisor and what to watch out for.

Comparing costs

Every dollar you hand over to a broker or advisor is a dollar less you have to invest, so compare costs and value received for those costs. Insist that your broker or advisor disclose all fees, which may include one or more of the following:

• A percentage of the total value of your portfolio (referred to as “assets under management”). For example, a full-service financial advisor may charge one or two percent of the portfolio’s total value. If your investment portfolio is valued at $1 million, that’s $10,000 per year, and most advisors collect that fee regardless of whether your investments earn money.
• Hourly fees for consultations and advice.
• A flat fee (typically $1,500 to $2,500) to create a one-time financial plan.
• Commissions, in the form of additional compensation when an investment is bought or sold.
• Mutual fund fees. If your advisor sells you a mutual fund, that fund will charge its own, separate fees to compensate the manager of that fund and cover other management costs.
• Performance-based fees, if the portfolio’s return exceeds that of a certain index or performance benchmark.

If you’re going to pay an advisor a certain percentage of your portfolio’s value, make sure that fee is tied to a performance benchmark. For example, stipulate that the fee not exceed the return on that portfolio or that your portfolio must outperform a certain index before the fee is paid.

Comparing quality and service

Don’t think solely about the costs of a broker or advisor. If you can find an advisor who charges 5 percent of your portfolio but delivers a return of 15 percent annually, you’re obviously better off than if you pay 1 percent and get a return of only 5 percent flying solo. Additionally, a qualified financial advisor can save you money in the following ways:

• Creating a solid investment strategy that balances risk and return
• Offering general financial advice to increase your net worth
• Avoiding emotional decisions
• Structuring withdrawals from accounts to minimize taxes and penalties
• Ensuring you’re sufficiently insured against personal tragedies, such as accident, illness, or death
• Helping you navigate major financial events, such as receiving an inheritance and planning for a child’s higher-level education

Bottom line: Try to estimate the dollar value a financial advisor brings to the table. If the advisor will save and earn you more money than that person charges, the person is worthy of consideration. Use this benchmark to compare advisors. Which one is most likely to deliver the most bang for your buck?

Checking credentials

Before you sign over control of any financial assets to an investment professional, check the person’s credentials on Investor.gov. You can search for the person by name or by Central Registration Depository (CRD) number, as shown. If the person is a registered investment professional, the initial search result shows the person’s name and CRD number, and indicates whether he’s a registered investment adviser, a registered broker, or both. (By the way, Ivan Illan, whose information is shown, happens to be the author of Success as a Financial Advisor For Dummies [Wiley>.)

You can click the Get Full Report button for additional details, including licensing information, years of experience, number of exams and licenses, and any disclosures about compensation or fees. This is the same detailed information you’d get if you looked up the broker or advisor on the Financial Industry Regulatory Authority"s (FINRA) BrokerCheck web page.

Comparing online brokers

If you decide to go with an online broker, two of the most important considerations to make as a cannabis investor are as follows.

• Access and fees for over-the-counter (OTC) trades: Most cannabis stocks in the U.S. are traded OTC, and many are penny stocks (which generally trade for less than $5 per share. You want to be sure the broker supports OTC trading and that any extra fees it charges to process OTC trades are competitive.
• Access and fees for trading foreign securities: If you’re interested in investing in companies that do business in countries other than the U.S. where cannabis is legal, such as Canada, be sure the broker supports trades in foreign securities and that any extra fees it charges to process those trades are competitive. (Some foreign companies have listings in the U.S. and trade like U.S. listings, without the extra fees.)

While most online brokers advertise $0 charges for online equity trades, these free stock trades usually don’t apply to OTC penny stocks and trades in foreign securities. Be sure to read the fine print. Many online brokers charge an extra fee for trades of shares priced less than a certain dollar amount. Most charge extra for trades of foreign securities plus a currency conversion fee.

Here are a few online brokers you may want to compare:

• Charles Schwab enables you to trade securities in foreign markets by opening a global account. You can buy and sell OTC securities through a Schwab One brokerage account.
• E*TRADE used to offer an extensive global trading service but no longer does. Now, to trade in foreign securities, you must place your order over the phone. E*TRADE does allow the exchange of OTC securities but generally discourages OTC trading due to the heightened risks.
• Fidelity enables all non-retirement brokerage accounts to add its international stock trading features. It also provides traders access to the OTC market. In fact, Fidelity’s stock screener can search specifically for penny stocks that trade on OTC exchanges. In addition, they don’t charge an additional commission on OTC trades.
• Interactive Brokers is the best choice in this list for trading on foreign exchanges, providing access to more than 200 countries and charging the lowest commissions. Where Interactive Brokers excel is with those who want to trade Canadian stocks directly, as the trades can be done online at a much lower price than that offered by competitors. Interactive Brokers also provides access to OTC markets.
• TD Ameritrade offers no direct trading of foreign securities, but it does allow OTC and penny stocks to be bought and sold online for the same fees as other types of trades. Like Fidelity, TD Ameritrade’s stock screener enables you to screen specifically for penny stocks.