This is a guest post by Robert Baillieul, B.Comm. of IncomeInvestors.com this articles was originally posted at: “9 Hard Truths Your Stock Broker Won’t Tell You” and is republished here with permission.
Would your stock broker lie to you?
Would they say anything to snag your business? Would they say anything to justify their huge fees? Would they say anything to turn you into a submissive client who follows their every word like a loyal puppy?
Over the years, I’ve seen hundreds of people stung, robbed, and burned by unethical brokers. To them, you look like a talking ATM. The goal of the game is to move the money from your pocket into theirs.
I know. I worked in the industry. My career started in a brokerage shop, helping salespeople run their business. They’d high five each other every time one scored a huge commission or landed a big client.
But as much as brokers might think it, investors aren’t dumb. People know when they get fed a line. They know something feels off, even if they can’t quite put their finger on why.
It’s odd for me, a financial insider, to spill the beans on the problems in the industry. But really, who better? Who knows more about the lies told in this business than someone right smack dab in the center of it?
Why bring it up? They make the honest folks look bad. Lots of people in the profession work with full integrity. They struggle, though, because of the reputation given by the less-than-ethical swindlers. They spoil it for those working hard in the best interests of their clients.
It’s time to fight back. Below, I’ve listed nine hard truths your broker, sales rep, or financial adviser will never tell you. Take a look so you’ll be ready.
They don’t care if you lose money: Brokers get paid on commission. Top performers get rewarded with huge salaries, fur coats, “Rolex” watches, and exotic trips. No investment house, however, rewards their stock brokers for making their clients money.
They sell a lot of junk: Your stock broker has an incentive to load up your portfolio with risky investments. Complicated products like options, new issues, penny stocks, and in-house mutual funds can ring up big fees. In contrast, brokers make almost nothing selling safe T-bills, bank certificates of deposit, and money market funds.
They have quotas: The best investments, as we’ve covered many times here at Income Investors, are usually the ones you buy today and hold for the rest of your life. Your broker, however, only makes money when you trade stocks. If his income depends on the number of trades you make, do you really think he’ll pitch a stock you’d never want to sell?
They have little education: Few stock brokers have any knowledge of security analysis. Most get only a few weeks of training, and almost all of that is sales. Getting a license requires no formal education, other than passing a few token exams.
Their research is worthless: Most shops offer other services to pay the light bill, such as investment banking for corporate clients. For this reason, analysts almost never write bad reports. Giving a “sell” rating could offend the firms they cover, biting into their other lucrative rackets.
They don’t work for you: You might think that when a broker receives your order, he’ll search the market for the best price. After all, that’s what you pay him for. But actually, orders often get routed to alternative exchanges, where retail investors get fleeced by hedge funds, investment banks, and high-frequency traders. Brokers don’t mind seeing their clients get ripped off because they get a kickback.
Their mutual funds suck: Stock brokers claim their mutual fund managers search high and low for the best value. In reality, most of them just run glorified index funds. That way, they can save money on investment research while still charging big management fees.
Their returns look awful: Last year, two-thirds of large-cap mutual fund managers underperformed the S&P 500. Over the past 15 years, more than 90% underperformed the index. After fees, these numbers look even worse. (Source: “Bad times for active managers: Almost none have beaten the market over the past 15 years,” CNBC, April 12, 2017.)
Their fees will suck you dry: Investors pay out the nose for the privilege of earning lousy returns. Many mutual funds ding investors 1.5%, two percent, and 2.5% each year. I recently covered one that charged nearly three percent! By comparison, you can often find index funds that charge a fraction of these rates. Over the years, that can result in savings of hundreds of thousands of dollars.