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The Search for a Good Broker

The Smart Profits Report: Issue #302
Thursday, April 20, 2006

The Search for a Good Broker: Five Tip-Offs Your Broker’s A Fraud
By Steve McDonald
Advisory Panelist, Mt. Vernon Research

Working in the money business has some disadvantages. For one, your friends and family ask your advice, but rarely follow it.

And last weekend, a friend asked me to clear up some confusion about her brokerage account. What caught my eye first was that she had a new broker. I asked if she was acquainted with him. She said no, but added she was certain that her former broker would choose a successor who was reputable, instead of making her search for a good broker.

“Oh, really,” I said. “Did you know that when a broker retires he sells his clients to another broker?” My friend said she wasn’t aware of that. But here’s why she should be…

Rules of the Road When Searching For a Good Broker

Sadly, most people are not aware of the behind-the-scenes activity of their brokers or the brokerage industry at large. But the personal hand-holding that many brokers claim as their stock in trade is one of the first broken promises.

In looking over my friend’s experience, I came away unimpressed by her broker’s performance.

Five red flags popped up…


  • Superficiality - The new broker had sent her what I refer to as typical boilerplate preprinted material. It included colorful pie charts and groupings of equities and graphs that illustrated hypothetical results based on apportionment of investments. This was flashy stuff intended to appeal to one’s eye. It’s meant to convey that the broker did a lot of work on your behalf. He didn’t. He spent about five minutes plugging material into a computer. Voila!
  • No “Getting to Know You” - My friend’s account had in excess of $500,000. With that hefty amount, you’d think she’d at least get a visit from her broker. But she didn’t. Just a business card.
  • What? No Prospectus? -The new broker had sent his new client a list of all the mutual funds he was recommending, but failed to provide a prospectus or list the costs of investing in them. This is not just bad business, but potentially illegal.
  • Where Are My Stocks? - Despite the fact that my friend had six open stock positions, her broker was recommending mutual funds over stocks. With some diligence and hard work, he could have helped her diversify her stock portfolio. Why was he recommending mutual funds over individual stocks? Could it have anything to do with the higher payouts to the broker?
  • Flashy Titles - Does anyone know what a “Private Client Group” refers to? Nothing. The broker claimed to work in this group. But more than likely no such group exists. The broker is a broker. Period. Everyone is either a broker or on the administrative side of the business. Titles mean nothing unless they say President or CEO before someone’s name. The flashier the title, the more likely that people are trying to convince you they’re something they’re not.

There are good brokers and there are questionable ones. I get the sense that this guy is one of the latter. I think he’s looking for a big payout on several mutual fund sales from the large cash position in my friend’s account.

Signs Of A Great Broker

Here’s what I would look for in someone who’s going to manage my money:

  • Clear, understandable information and the willingness to work with me to make it clear.
  • Recommendations based on the appropriate amount of risk.
  • Realistic expectations.
  • As little flash as possible.

Full-service brokers will get you better execution and usually better pricing on options. They’ll also take necessary action in critical situations when you’re unavailable. As with everything else, you need to know with whom you’re doing business.

Good Trading,

Steve

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Today’s Smart Profits Cribsheet


  • If you’re getting ready to start trading options, this report from Karim Rahemtulla could save you some serious grief. And even if you’re an experienced options trader, he’ll reveal how you can more effectively handle any broker. The details are in Smart Profits #232, Secrets to Getting Started In Options.

  • When considering choosing a broker, make sure he understands how bonds could fit into your overall investment strategy. For an explanation of bonds and one of the foremost leaders in the trade, see Smart Profits #266, A Bond Play: Now, Something Completely Different. Karim Rahemtulla examines the expertise of Bill Gross, whose views are particularly timely given that the Fed is expected to put the brakes on rising interest rates.

  • As always, check out the Smart Profits Glossary for any option terminology you are unfamiliar with such as the differences between American options and European options or exactly what fungibles are.

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