The sad truth is that most stock brokers are sales people. While they have a more glamorous name, their profession is sales: selling investors like you on a product so they can get paid. And just like used-car salesmen, stock brokers have been known to make up a few stories every now and then. Here are a few key phrases to pay attention to so that you can avoid just being another commission.
“This is a great fund!”
Do they mention who this is a great fund for? Is it a great fund because it’s performance is on par with the S&P500 for the last decade? Or is it a great fund because it’s going to pay the broker a nice commission? Remember, just because it’s a “no-load” fund doesn’t mean that it is a no fee fund. Many funds now advertise themselves as being “no-load,” when in fact they’ve just changed from charging a “sales load” to a simple purchase fee or other fee.
When a stock broker is selling you on a mutual fund, you should make sure that it matches what you’re looking for in a fund. Also, ask the broker for similar funds or ETFs, and why they think the fund they’re recommending is the best. A good stock broker will present you will a category to invest in (such as large cap funds), and then usually highlight the top three to five funds, with regard to return and fees.
“This is a perfect investment for you!”
Most stock brokers aren’t financial planners, so unless they’ve evaluated your entire portfolio, talked to you about your goals, and looked at your total estate plan, they really can’t say that this investment is perfect for you.
Once again, make sure the investment really matches your needs. Many entry-level brokers are simply given a list of investment products to sell, and they just pitch them to you. They could be stocks, mutual funds, even annuities. Do your own research before committing to anything!
“I’m going to actively monitor your positions.”
Really? Because most stock brokers have hundreds of different clients and accounts, and they check each one about twice a year to see if they can make some money off of it by changing investment positions. Very rarely do stock brokers actually monitor your account once they’ve sold you. In fact, stock brokers don’t even have a fiduciary duty to actively monitor your portfolio — their duty is limited to simply executing the trade.
Some brokers use automated portfolio management systems, but once again, the only time they’ll be getting in touch is if they have a trade for you — and a corresponding commission for them.
If you are getting into an investment product that needs to be actively monitored, consider that a red flag. You’re most likely going to a broker because you don’t want to be trading stocks all day. As such, the broker should be looking at low cost index funds to balance your portfolio as a whole. Make sure that you’re not getting someone who is going to be day trading your money if you’re not looking for that.
The Bottom Line
The bottom line is that most stock brokers aren’t financial advisors and have no incentive to take care of their clients beyond the simple order at hand; they’re focused solely on generating gross commissions.
If you want someone to actually help you with your finances, and possibly point you in the direction of some mutual funds or ETFs that will suite your individual needs, you should look at spending some time with a fee-based financial planner. Their only incentive is to actually help you.
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About the Author: Robert Farrington writes for the The College Investor, a blog dedicated to helping young adults and college students with personal finance, investing, and student loan debt.
Photo Credit: Jack Straw
I’m glad you wrote this because I bet a lot of people thought they did have some level of duty to their clients. Always make sure you understand how anyone you hire gets paid so you understand their motivations.
Yep, the duty of care only applies to executing the transaction, nothing more!
Great piece! And I’m with you on #3, Robert. I always strongly suspected most of these guys rarely ever monitor anything on your behalf once they’ve got your business.
That’s why I prefer to handle my own business.
Out of place here I suppose – but I feel strongly about it, as you know, Len.
Consider investing only in that enterprise which you own and control.
Small business, farmland, whatever.
I know, Dave. And your comment is not of place.
I was a fee based advisor with fiduciary responsibility to my client (something commission brokers don’t have), so I should be excited by this, but pieces like this annoy me.
Sure, I’ve met some bad stock brokers who lie to their clients and tell them that “I’ll actively monitor this” or “this is a great fund.” But I’ve also met some absolutely rotten fee based advisors who cash in on their client every chance they get.
While we can hope that some type of job is the evil empire (I’m pretty sure it’s the attendant at the laundry mat who keeps giving me the stink-eye), the sad fact is that most people care about their a) credibility; and b) what others think of them in their community. Most of my commission friends will tell you “it’s a great fund” only if it fits your goals (because they want your return business) AND they’ll tell you “I monitor this personally” because they take their reputation seriously and only make statements they can back up so they aren’t embarrassed later. One guy I know says this and only follows about 25 funds TOTAL so he can tell the truth.
I have a better way to find out if your broker is a crook: Use FINRA broker check to see if there’s been history of lies or cheating instead of “all people who charge commissions are bad.”
Thanks for the counterpoint, Joe, and the reminder that there is a way people can verify a broker’s pedigree and history if they are feeling uneasy.
Now, if only we could get laundromat attendants to start up an equivalent association similar to FINRA, life would be perfect! 😉
I agree! Thanks for sharing your story! It is meant as a warning that you should just do your due diligence regardless of what any stock broker says.
In any industry there will be good ones and bad ones. I’ve also just found that in larger companies where clients and external relationships don’t matter, there seem to be more bad than good.
I would venture a guess that your friend runs his own firm or works in a small boutique, where individual relationships matter, and that is why he and his peers take care of their customers.
This is a nonsequitor, but — that’s a great photoshopped image of the Wall Street bull. Just wanted to say that. Okay, resume intelligent discussion!
It is, and it isn’t. You do need to be cautious when taking an advisor’s advice.
Great post. Remember that you and the broker have different goals. Your goal is to increase your retirement account, his goal is to churn your account as often as he can get away with it, thereby giving himself more income. You don’t need a broker. Sign up for your ROTH, regular IRA or traditional brokerage account at TD Ameritrade, (easy to read text and easy to understand website), Fidelity, an equally good company but I find their pages a little more challenging, or Schwab, any discount brokerage, and buy and sell your stocks yourself. If you have a stock you like, watch it every day, read a bit about it, follow the ups and downs. Then, when the stock dips low, buy some, and if it goes high, sell. This is simplistic, but it’s a start, and better than having someone who makes his money on commissions buying and selling your stock handle your accounts.
Simplicity is great though, and a lot of people don’t realize how they can do it themselves!
Simplicity is great, I agree. My wife has her own set of goals, which I respect, and I buy and sell common stocks of her choice through Ally.com, a minimal transaction fee broker.
She is currently entirely out of the market.
Financial advice, unfortunately, will always be tainted by the self-interest of the adviser. And like all service industries, the advice industry has a set of standard “products’ they wheel out in lieu of an actual tangible product a company like Coke or KFC or Macy’s has.
Usually, the standard product is the lowest common denominator to secure business. Promises of monitoring investments can be fulfilled with a cursory glance at a portfolio and a note to the client that ‘all is good, no changes required’ (and here’s my fee) Service industries like stock broking are built purely on promises and it is up to the integrity of the broker to actually deliver them to the client. Have a read of the disclaimers in a client agreement, all care, no responsibility!
I enjoyed your post, thanks Adrian
AND NEVER TRUST A PROPHET MAKING A PROFIT !!!
Oh. I’ve had a bad experience with realtors too. You can read about it in my blog.