Warnings About the Vagaries of Working With Stock Brokers

Brokers are not innately bad people, but the systems under which they’re required to function can make it tough for them to work in the best interests of their clients.

Having just a few days ago read Jeffrey Goldberg’s entertaining article in Atlantic magazine on why he fired his broker, I was intrigued to uncover a recent piece on CBS’s Moneywatch site that not only referenced the Atlantic article, but also offered a list of some important things that your stock broker may not tell you.

The author, a financial services veteran whose frank opinions about the mutual fund industry force him to write under a pseudonym (Patrick McDevitt), provides some cautionary remarks for those who do their investing regularly with stock brokers.  Rather than reproduce his post here, I’ll link to it and just paraphrase his nine points:

A broker’s recommendations might be based on how much money he stands to make, since brokers generally don’t have a fiduciary responsibility to clients.

A broker might not draw your attention to all the fees you’ll be charged.

Your broker may not know very much about investment concepts.

Brokers often are simply selling whatever is “hot” – just as it’s peaking.

Brokerage firms may have goofy definitions of what constitutes a diversified portfolio.

Brokers often have quotas to meet, and may be selling something to you because they need to meet them.

When you open a brokerage account, you usually sign away your right to sue in the event of a dispute.

The letters after your broker’s name may not certify much.

Your broker may have items in his or her disciplinary record that don’t show up in the FINRA website.

“Patrick’s” points are all on-target.  There are indications that help is on the way for investors; as I noted earlier, the SEC’s Mary Schapiro has been saying that she would like to see all financial advisors held to a fiduciary standard.  Congress is also beginning to get on the fiduciary bandwagon; House Financial Services Committee chair Barney Frank is starting to push for a bill that would impose a fiduciary standard on municipal bond advisors.

None of these things will relieve consumers from the need to ask good questions and understand what they’re getting (and paying), but as long as there are no snags along the way, these changes should make investors’ lives a little easier.

About the author

Thomas Fisher, CFP®
Thomas Fisher, CFP®

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