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Trust Your Stockbroker?

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Trust Your Stockbroker?
keep-calm-and-trust-your-broker-1 Source: keepcalm-o-matic.co.uk

We've all seen those small planes towing giant marketing banners across the sky before. They promote dentists, pharmacists, insurance companies, tire outlets—any sort of business you can imagine. Even if the sky was criss-crossed with these kinds of advertisements, would you believe them if they read, "TRUST YOUR STOCKBROKER"?

This is what brokerage firms desperately want: their service relies upon clients trusting the supposedly unbiased judgment of individual brokers. When investors lose faith in their stockbrokers' ability to uphold this principle, it makes it difficult to justify allowing them to handle your investments. In essence, the entire brokerage industry depends upon trust, a scarce commodity indeed.

Stockbrokers undoubtedly have an important role to fulfill in advising and educating their clients on the most appropriate investment vehicles for each client's purposes and preferences; however, there are some fundamental conflicts of interest at play with brokers that must make one wary of falling victim to.

Trust Hard to Come By

Although there are plenty of decent and honest brokers out there, it's undeniable that the task of a stockbroker is oftentimes more style than substance, more about selling than advising. The wide array of firms and financial institutions that offer brokerage services may successfully project an atmosphere of impartiality and credibility, but the truth is that these two qualities are found in the industry on a rather infrequent basis.

In theory, it stands to reason that possessing credibility as a financial expert and an unbiased perspective would be the virtues that form the basis for the entire brokerage field. The truth is that, in practice, neither of these necessary qualities make it into the job description. The mere appearance of propriety is what's important; as we will see once the veil is pulled back just slightly, notions of propriety and competency don't necessarily serve any purpose in the actual execution of a broker's duty to his or her employer.

Peddling Stocks and Bonds

We sometimes lose sight that brokers are sales associates just like in any other industry because the products they sell are of such importance to us personally. Nonetheless, they are salespeople all the same.

A strong sales acumen is the penultimate requirement for becoming a broker. Credibility as an expert is secondary. Believe it or not, many stockbrokers are only tacitly in-tune with news in the financial markets and the actual concepts of investing and finance. This is because it's not truly germane to their job.

Retro-salesman-e1367455001858Their heavily incentivized, frequently commission-based work actually centers around selling. Brokers are only trying to sell you a product—in this case, an investment or financial product. They obviously must possess some basic knowledge of the products themselves, but how applicable or beneficial that investment vehicle is to the client is unimportant. They must know enough to sell the investment, but have no incentive to understand or analyze what they're offering. It's a clear case of "heads you win, tails I lose": irrespective of the performance of the product they sold you, a broker is paid for the sale either way.

Moreover, stockbrokers are encouraged to peddle "in-house" financial products that are managed by the firm selling the security because this generates larger profit margins for their employer. Whether or not this is the right product for you is largely irrelevant; the broker has a conflict of interest in selling a specific type of product.

This undoubtedly pokes at the idea of impartiality. It's like portraying yourself as a "fashion consultant" when you work for J. Crew.

Buyer Beware

It's nothing new for stockbrokers to dole out biased advice in order to drive clients to particular products. This has been a widespread problem since at least the 1980s, when Wall St began to come into greater prominence and attract more talented employees.

The issue doesn't seem to be going anywhere, either. One common tactic that big investment banks have come under fire for is talking up the market (or a particular product) in order to make a sale, then betting against that very investment. When this scheme works, the firm makes money on both ends, while the client that trusted them is victimized. Though not all stockbrokers are willing to engage in such impropriety, it goes to show that the surest way to avoid these scenarios is not to entrust someone else with your money in the first place.

About the Author

Everett Millman

Everett Millman

Analyst, Commodities and Finance
Managing Editor

Everett has been the head content writer and market analyst at Gainesville Coins since 2013. He has a background in History and is deeply interested in how gold and silver have historically fit into the financial system.

In addition to blogging, Everett's work has been featured in CoinWeek, Advisor Perspectives, Wealth Management, Activist Post, and has been referenced by the Washington Post.

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