Is My Brokerage a Scam?

I've come across a brokerage firm called ChoiceTrade.com. I'm impressed with the firm's commission schedule, but I'm also suspicious: Each time I call, the same person answers. How can I find out if the firm is legitimate and is insured by the Securities Investor Protection Corp., as it claims? -- Name Withheld

Rest easy. ChoiceTrade isn't some guy answering calls from a lawn chair in his garage. It's just a small firm, registered to conduct business in only 21 states. We can't say precisely how small the firm is because the company, which is based in East Brunswick, N.J., is privately held, and principal Richard Bertematti won't disclose its assets.

Tech-savvy crooks often create Web sites that look like legitimate businesses, so you're smart to ask questions and investigate. Start with NASD, the brokerage industry's self-regulatory body. On its Web site, www.nasd.com, you'll find a summary of a company's Central Registration Depository (CRD) report, which contains disciplinary and regulatory actions, settlements and complaints. Then select NASD BrokerCheck. Go through that process for ChoiceTrade and you'll find that it has been registered for five years, during which there have been no negative disclosures.

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For more-detailed information, check with your state's securities-regulation agency, which should be able to provide complete CRD reports. To hook up with your state's regulator, go to www.nasaa.org, the Web site of the North American Securities Administrators Association.

The Securities Investor Protection Corp. (SIPC) serves a different purpose. It insures securities in customer accounts up to $500,000, including $100,000 for cash claims, should a brokerage fail. It does not insure against losses stemming from market declines. To see if a company is insured by SIPC, call 202-371-8300 or go to www.sipc.org.

As for your concerns about the same guy always answering the phone, we had a few conversations with him, too. It really is a small firm.

Limits on deductibles

I have recently been informed by CitiMortgage that it has purchased my mortgage and requires a maximum deductible of $1,000 on my homeowners insurance. I currently have a $2,000 deductible on my policy. I would like to contest this, as it will increase my premium. What are my options? -- G.R., Baton Rouge, La.

You may have no choice but to pay up. Choosing the highest deductible you can on your homeowners insurance does make sense. Not only do you lower your premium, but you're also less likely to file a small claim that could cost you a claims-free discount and eventually cause your insurer to drop you. Increasing your deductible from $250 to $1,000, for example, can lower your premium by as much as 25%. Jumping from $250 to $2,500 could cut your premium by up to 30%.

But sometimes you don't have an option. CitiMortgage says it's just following a policy set by Fannie Mae and Freddie Mac, which are major investors in the mortgage industry. Both Fannie and Freddie generally require that deductibles for homeowners insurance be no more than $1,000 or 1% of the coverage, whichever is greater. If you have a $200,000 homeowners policy, for example, your deductible can't be higher than $2,000.

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Because so many mortgages are purchased by Fannie and Freddie, you might have a tough time getting an exception or finding another lender with a more liberal policy. But here's a creative way to raise your deductible: Buy more insurance.

Marshall & Swift/Boeckh (MS/B), which provides rebuilding cost estimates to insurers, says 59% of homes in the U.S. are underinsured, by an average of 22%. That's mainly because homeowners neglect to adjust their policies to keep up with rising construction costs and major home improvements. It can cost less than $100 a year to increase coverage on your dwelling by $50,000, and you can help offset that with the higher deductibles permitted by Fannie and Freddie on larger policies.

Stocks for kids

I'd like to give shares of stock to my kids. I can spend $50 per child and want them to be able to recognize the companies. Can you point me in the right direction? -- Jennifer Allis, Lockport, N.Y.

One of the most efficient ways to buy a small number of shares is to go straight to the company. Hundreds of firms sell shares directly to investors. Unfortunately, most set minimum investments well above what you want to spend. Of the seven U.S. companiesÑyes, sevenÑthat let you start with $50 or less, the only name that might ring a bell with kids is Walgreen. And a drugstore chain wouldn't register too high on a kid's "wow" meter.

Invest more and the recognition factor increases exponentially. The initial minimum for a direct purchase of Domino's Pizza or Dell is $250. Nike and Best Buy have $500 minimums. Disney, the kiddie gold standard, lets you in for an even grand. Typically, you'll also have to pay small fees.

An alternative approach is to open custodial accounts for each child at ShareBuilder. There are no minimums, and the commission for a one-time investment is just $4. You can even purchase partial shares. For example, with Disney recently trading at $26, your $50, less the $4 commission, would buy 1.8 shares.

State-tax deductions

I'm a bit confused. If I live in Virginia and purchase a 529 college-savings plan offered by the state of Iowa, do I qualify for a tax deduction on my contribution? -- Terry Hiebert, Annandale, Va.

Sorry, no. To get a state income-tax deduction you need to live in one of the 26 states (or the District of Columbia) that offer a deduction, and you must buy your own state's plan. So Iowa residents qualify for a deduction on the Iowa plan, but you don't (although you're permitted to buy it).

You could, however, get a nice tax break if you sign up for Virginia's own 529 plan. Virginia residents can deduct up to $2,000 a year per account and can carry the deduction forward for an unlimited number of years if they contribute more than that. A $6,000 contribution, for example, would get you the full $2,000 deduction annually for three years. The $2,000 cap doesn't apply to investors age 70 and older, who can deduct their full contribution in one year.

Another strategy is to contribute just enough to your own state's plan to get the full state income-tax deduction, and then invest the rest of your money in another state's plan that you like.

My thanks to Jessica Anderson and Amy Esbenshade Hebert for their help this month.