Guest Post: The Tale Of Another Reformed Broker

Josh here, the below guest post comes courtesy of Roger Bond, a private investor with a background similar to mine in the retail brokerage business. I hope you enjoy it and note the similarity between his opinion of the industry and mine – we’ve never met and know none of the same people, this is just how it is. – JB


Roger Bond has been investing his own, and family money, for almost 30 years. Once a registered investment advisor he now manages private money and writes for financial websites including his own:

Can I Trust My Stock Broker?

Two out of three people make money in the stock market. Bull or bear market, it does not matter.

If that sounds too hard to believe, then let me explain.

Whenever the typical stock market investor places a trade, his or her broker makes a commission; so does the firm the broker works for. That is two people making money in the stock market.

Who is the third person, you might ask? The loser of the three? Why that is you, the average investor, of course!

What Your Broker Probably Doesn’t Know

When I was a freshly minted stock broker many years ago, I had several years of experience as a successful investor myself, so I was pretty sure I knew what ma and pa client wanted and needed.

What I noticed immediately was that I was not like the rest of the brokers in the office.

The differences between the other brokers working there and myself really stood out to me. It seemed that most of them – regardless of time in the profession – were completely oblivious to:

  • What it was like to invest their own money, aside from a hot tip “flyer” on occasion
  • What it was like to LOSE their own money on something that wasn’t supposed to be a roll of the dice
  • What the tax ramifications were of the recommendations they made
  • The conflict of interest in their own research departments (now in the headlines these last couple of years)

What further bothered me was that even though most brokers realized the conflict of interest between themselves and their clients, few were actually concerned enough for their client’s well being to have it affect their own professional behavior.

Certainly there are exceptions. Some brokers (usually successful ones) do realize that a happy client will be a long term client. But a disturbing number of brokers simply played a numbers game. Bring in enough new money fast enough and it really doesn’t matter what is happening to current and past clients.

The Problem Of Low Yielding Cash

An interesting similarity to today’s investing climate is that back in the ‘80’s we also had the problem of falling CD rates. Back then, though, they were falling from a much higher level to a rate that would make retirees ecstatic today!

This presented an opportunity for stock brokers, actually quite a lucrative one. Free seminars were run weekly touting “CD Alternatives” that were basically just deferred annuities to replace low(er) yielding bank certificates of deposit.

The neat thing about these annuities was that they paid huge commissions to brokers who sold them. This was a tremendous incentive to get an insurance license, a requirement to sell annuities.

Were these annuities a bad deal for clients? Not always, it depended on the client’s specific circumstances – which few brokers bothered to care about. One thing for sure is that it typically locked up the person’s money for 5 – 7 years via a declining percentage redemption fee.

But placing $100,000 of client money into a bank CD typically paid the broker $25 – $50 back then. Contrast that to the commission on an annuity that could be upwards of $7000 for that same $100,000 investment!

Make no mistake; many of these brokers became my friends (some of whom also eventually became “reformed” brokers). But despite how much I loved investments, this was not the life for me.

Because despite all of the hot air a brokerage firm might expel telling new brokers, new clients, the media and the SEC that their first priority is finding investments that are suitable for the client in every way, there is nothing like being told to get on the phone and sell [whatever the firm took down too much of] to people who can write a check today, suitable or not. Start dialing!

Could It Have Been Just THAT Brokerage Firm?

After leaving the brokerage industry I went to work for an accounting firm in another city and due to my investment experience found myself assisting with the tax returns of several prominent area stock brokers.

Much to my surprise, despite incomes that in today’s dollars range upwards of half a million dollars per year, I found that these brokers ate very little of their own cooking. Instead these guys spent it.

These brokers might toil all day showing clients graphs of how their IRA will compound to millions of dollars over the years if they invest properly (with them); then go home at night to their $2500 personal IRA; funded two years at $2000 each, performing poorly in some “designed especially for IRA’s” program that their firm pushed heavily a few years back.

The one piece of home cooking they did try themselves turned sour yet had no apparent impact on what they continue to push on clients ever after.

How This Affects You And Your Money

Stock brokers can be decent people (I once was one!), but the conflict of interest between your investment returns and their commissions will be a perennial battle. And the full time professional will likely be the winner of that battle.

One thing you can do is take control of your own money. Perhaps start with a small portion of your investment capital in a low fee online brokerage account.

Spend a little time on quality websites (like this one) and even subscribe to some investment newsletters that have no vested interest in the number of times you trade or what specific investments you make.

A few years ago I created a website where I review investment newsletters to help investors determine which publications would be profitable and worth the subscriptions costs so they can perhaps distance themselves, and their money, from brokers who care more about themselves than their clients.


Roger’s site, where he reviews investment newsletters, is here.


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