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Everything Your Broker Tells You is Wrong


Not everyone is equipped to make the right decisions or handle the pressure of managing their own money. Here are some tips for not getting fleeced by your broker or planner.

This article published with permission from InvestmentU.com.

This weekend a money manager and I were talking at his home in Los Angeles. As we sipped an excellent Malbec on his patio, we looked out over the Hollywood Hills where we could see the house belonging to his former neighbor, Madonna.

This money manager is one of the good ones. Not because his performance is outstanding — actually, I have no idea what his performance numbers are — but because he takes his fiduciary responsibility to his clients seriously.

Oddly, he believes that if he takes care of his clients to the best of his ability, he will make a decent living. And so far he’s been proven right.

Unfortunately, that’s not the case with many brokers, financial planners and money managers. If your broker is pitching you a specific mutual fund, you can bet your bippy that he’s being incentivized to do it.


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In other words, he’ll make more money for selling you the XYZ Financial Institution Large-Cap Fund than if you bought an inexpensive no-load index fund such as the Vanguard Total Stock Market Index Fund (VTSMX), a member of Gone Fishin’ Portfolio.

According to recent survey of senior-level financial service professionals, 30% responded that they felt pressure to “compromise ethical standards or violate the law as the result of their compensation or bonus plan.” Further, another 23% also felt other pressures to “compromise ethical standards or violate the law.” And that’s just the guys at the top…

Some brokers get paid commissions every time a client makes a trade. You can be sure those clients’ accounts are much more active than those who receive a set fee no matter how many trades they make.

For example, during the height of the dot-com boom, an 86-year-old relative of mine was advised to buy Intel (Nasdaq: INTC). Today, Intel is one of my favorite companies because it’s stable and has a healthy and rising dividend. In 1999, it was a tech company that was not appropriate for most octogenarian Grannies.

Don’t get left behind

Where Are the Customers’ Yachts?

There’s a classic book on Wall Street called , which refers to the idea that the stockbrokers are the ones getting wealthy and the customers are left behind.

Think about it. How many middle-class stockbrokers do you know? Chances are, if they’ve lasted in the business for a number of years, they’re probably making a lot of money.

Get Rich with Dividends

In my book, , a classic in its own right (or in my own mind), I argue that the only reason you should work with a broker or financial planner is if he can do a better job than you, or if paying him to take care of it for you helps you sleep at night.

Not everyone is equipped to make the right decisions or handle the pressure of managing their own money. In those cases, it makes sense to hire a professional.


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Oxford Club

But most people handle it. As and Investment Director Alexander Green often says, “No one cares more about your money than you.”

Here are some tips for not getting fleeced by your broker or planner.

1. Don’t use one

If you’re reading this column, you already have an interest in investing; therefore, you likely have the aptitude. It’s not rocket science. There are easy ways of conservatively managing your money without having to learn lots of complicated theories.


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Gone Fishin’ Portfolio is a perfect example. So is the 10-11-12 System in Get Rich with Dividends. If you’re going to manage your money yourself, use a discount broker like Schwab, Ameritrade, E*Trade, etc., that will execute most trades for $10 or less and won’t charge you a percentage of your assets every year like many full-service brokers.

2. Get your advice from someone with no conflicts of interest

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The Oxford Club

As I mentioned, a broker might receive a bonus for recommending a mutual fund. Certain newsletters get paid to promote risky stocks. ( and NEVER receive compensation for a recommendation and our editors are not allowed to recommend stocks they already own.)

Analysts at the big brokerage firms often pump stocks of companies they want to or already have investment banking relationships with. Be sure whoever you’re getting advice from is truly independent.

3. If you do use a broker or planner, be sure it’s fee only

This means you’ll pay a percentage of your assets under management rather than a transaction fee every time you buy or sell. This avoids churning your account or overtrading for the purpose of generating commissions. Paying a percentage of your assets under management also aligns your interest with the broker’s. If your assets go up, so does the broker’s fee. If it goes down, he makes less.

**And never pay a fee of more than 1% per year. There is no reason to. If your broker charges a higher amount, even for a small account, take it elsewhere. There are plenty of others who will do it for 1% or less. If you have a large account, negotiate a lower fee below 1%.

There are some good people who manage money for others and work hard on behalf of their clients. I know quite a few. But in most cases, you’re better off handling it yourself.

And if you’re a novice investor, go slowly and be conservative. Don’t jump at every great recommendation (they all sound great). There will be plenty of time for that later once you’re more comfortable. And perhaps most importantly, be sure you’re not making someone else rich who isn’t doing the same for you.

Marc Lichtenfeld is the Senior Analyst at InvestmentU.com. See more articles by Marc here.

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