9 Things Your Stockbroker Doesn’t Want You To Know
Even though you’ve been buddies since high school, before you invest a penny with your stockbroker, it’s important you realize that his interests may not always be aligned with those of your own. Based on our first hand, and not always pleasant experiences, here’s a list of things you should keep in mind before investing with a broker.
1. You can trade online without a broker: The most overt secret in the industry, your stockbroker does not want you to wake up and smell the coffee. The truth is that anyone can trade online by himself, but if you knew, it would mean that your broker’s role is largely irrelevant, now wouldn’t it? Today, many online brokerages provide an easy and transparent means of choosing your own trades.
2. You’re not Warren Buffett: All Stock brokers love to tout their Warren Buffett strategy as the world’s greatest stock picker due to his impressive track record. They will give you the false impression that ‘if Buffett could do it, so can you’. The only problem is that Warren Buffett has consistently advised investors to invest in index funds.
3. They may not be upfront about your fees: A stockbroker could place you into a wrap account, meaning it can own a variety of mutual funds and other investments. This includes the brokerage account’s 1% annual fee. On top of that, the broker might ‘forget’ to mention that you will also have to pay other hidden fees which can include the expense ratios and transaction costs of the funds inside the account. And just in case you thought these appendages are small and insignificant, they can easily double your total fee.
4. They might not know as much as you think: Your broker is first and foremost a salesperson before he is a financial expert. The only requirement needed to practice the profession is passing a licensing exam from the NASD, but the exam does not actually demand any demonstration of investment expertise. So if your gut tells you that you have a better understanding of investment strategies than your broker does, you probably do.
5. They hop on the bandwagon: Brokers like to buy and sell the flavor of the month, rather than what looks good for the future. In 1999, it was tech funds. In 2006, it was real estate investment trusts. But which broker bought shares in Priceline before their shares skyrocketed an impressive 5,237%? Or which broker foresaw the US subprime mortgage crisis which crashed the markets in 2008? The answer- probably not yours.
6. Their quotas trump your success: It might make the most sense for you to buy in stock for the long term, but this approach could be a conflict of interest for your broker’s firm. Why? Because it reduces their commissions. Think about it, what incentive does a kid out of college have if his clients hold on to their investments for five years? Especially if he hears his coworker in the next cubicle moving his client’s money in and out of stocks all week, collecting commissions like hot cakes.
7. You can’t sue them: The vast majority of offline brokers are members of the self-regulated Financial Industry Regulatory Authority (FINRA). They ensure that when you open a brokerage account, you forgo your right to take the firm to court. You are in essence consenting that any disputes will be settled through a FINRA run arbitration process which is kind of like trying to sue the judge.
8. The words after their name don’t mean anything: All the fancy titles brokers add to the end of their name share one common goal- to give them a sense of credibility. But the truth is that these often fabricated titles hold no more actual value or relevance than if they were to add ‘Mr.’ at the beginning of their names.
9. The best person to trade your money is you: No broker wants you to know how easy it is to trade online. If you search the web, you will find many opportunities to trade with numerous online brokerages who will be more than happy to teach you the trait in return for your business. This new phenomenon already has many Wall-Street brokers shaking in their boots, and for good reason, as self-trading makes for a whole lot of financial sense.