In response to the bankruptcy filing of Peregrine Financial Group this week and the MF Global filing last year, here are some red flags to watch out for in picking a broker (or continuing with one) to handle your futures trading and hedging:
- Review the financial information that is available regarding the financial health of the brokerage company. If the financial statements are audited by a CPA firm that you have never heard of or cannot easily find in doing an Internet search, this can be a red flag. Peregrine's auditor appears to be a very small firm in Illinois.
- If the owner of the brokerage is located in your community, review his lifestyle. If the owner has the largest home in the area and appears to be consuming a lot of money to fund his lifestyle, this can be a red flag. Peregrine's owner had a private jet, donated lavishly to the local college, opened a high-end restaurant with a lavish wine offering and probably had one of the largest homes in Cedar Falls, Iowa.
- Talk to other farmers who are using this broker and other brokers. Many times, areas of concern can be communicated this way.
- Review the disciplinary actions that may have been taken against the broker. If there are several, this can be a red flag.
- If the broker ever tries to tell you that you may need to wait a day or two to get your money, get it all out as fast as you can. This is a huge red flag.
- Remember that if you have money invested in stocks and bonds at a regular investment company such as a Merrill Lynch, there is SIPC insurance to protect this money. As of yet, there is no protection for funds invested in commodities (there may be some funds available at times).
Remember, the bottom line is that it is your responsibility to determine if your commodity broker is sound. Don't assume somebody else will bail you out. (You are not Bank of America, Citibank, etc.)
This advice can also be used for almost picking any professional financial adviser.