How to Make Sure That a Broker Is Serving You Well
This is a fantastic time to be a stock broker--again. The market is up, the competition is down, and most of the alternatives to stocks look like chopped liver.
Unfortunately for individual investors, great times for brokers don’t always translate into great times for their clients.
When the market is hot, investors let their guard down. Inexperienced brokers have an easier time getting in a potential client’s door. The chance of being sold unsuitable investments--or downright awful ideas--rises sharply. It’s happening out there right now.
Don’t take this the wrong way. Some people love to bash all brokers, arguing that 99% of them are losers. C’mon--there are people in the business who do a good job for clients, or at least try. Someone else can argue whether the truly talented brokers are 1% or 50% of the total. Who knows?
Rather than debate the percentages, it’s better to spend a little time thinking about what you can do, as an investor, to make sure your broker serves you well. You have the power.
A few tips:
* Don’t be afraid to ask ‘why?’ Your broker probably is full of ideas right now, especially for stocks. Good. But for every pitch you get, you ought to be asking the broker point-blank why the idea is right for your specific portfolio. And “It’s hot!” is a lousy answer.
“If there’s one thing you have to remember as a broker, it’s that you have to keep the client’s best interest at heart,” says Anthony Chidoni, who heads Donaldson, Lufkin & Jenrette’s Century City brokerage office. Of course that’s so basic. Yet it’s amazing how many brokers think of their firm or their commission before they think of what’s truly best for the client.
When was the last time the broker sat down with you to discuss your portfolio mix? Does the broker have a clue about your tax situation? Does he or she know what your income needs are now? Does the broker even know what your basic financial goals happen to be for the next five years? If the answers are negative, get a new broker.
* Most traders still lose. It’s very tempting to quickly trade in and out of stocks today. If you’ve got a broker who really does this well, more power to you. But if you’re really not a trader and your broker has never demonstrated that ability either, why agree to play this game?
One Los Angeles broker, now a branch manager, candidly admits: “The more trades you make, the greater your chances of screwing up.” He says he has made more money for his clients as a branch manager over the past six years than in the previous 20 as an independent broker. Why? “Because as a branch manager I’ve tended to be more of a buy-and-holder than an active trader, because of the time the management part of the job requires.” A few words to the wise?
* Beware musical-chair brokers. Because so many people have left the business since 1987, and so few firms are training new brokers, there’s a premium on the top producers. As the market stays hot, some firms are paying big bucks up front to get brokers to jump ship.
If your broker suddenly joins a new firm--or you get solicited by one who has just recently joined a particular firm--better ask a few questions. Did the broker change jobs for a big bonus? Why did he or she leave the old firm? What does the new firm offer a client that the other didn’t?
Some brokerages, such as Donaldson, Lufkin & Jenrette, and Bear, Stearns & Co., refuse to pay upfront bonuses to attract new talent. Jimmy Cayne, president of Bear, Stearns in New York, argues that the firms that do pay such bonuses are “only (those) that really have nothing to offer other than a check.” In other words, he contends, the broker goes for the bonus, but the client gets gypped in the end because there isn’t the research or trading support to back the client’s investments.
Of course, some brokers who change jobs do so because they genuinely see better opportunities for clients at another shop, with or without a bonus. But if your broker is regularly changing venues, you ought to take a hard look at whether the fast money means everything to that person--and whether he or she is getting ahead by generating lots of commissions to earn the title of “big producer,” at your expense.
Briefly: Contrarians take note: One of the market’s big short-sellers, the Feshbach brothers’ firm of Palo Alto, has put its corporate jet up for sale. The Feshbachs and other short sellers--traders who bet that stocks are going lower--have been badly mauled in stocks’ rally so far this year. Maybe the sale of their prized possessions will mark the bottom for them--which would be the market top for everyone else.
