10 Things Your Broker Won’t Tell You

The investment industry has convinced many investors that they need a broker to help them navigate the markets. Although some investors may benefit from a competent adviser, most have fallen victim to incompetent salespeople. Here are 10 things your broker will not tell you.

1. My Recommendations Might Be Biased

Most brokers are commission based which often represents a conflict of interest. A broker may not always have your best interest at heart. They make money when you purchase something from them, some products pay more then others so why not sell you something that makes him/her more money? Sometimes the firm maybe pushing their brokers to sell a specific investment or product so you may receive calls regarding this “great opportunity” (often it is a great opportunity, however for the firm and not you).

2. I Probably Will Not Tell You all Your Fees

Often client’s pay fees they are not really aware of, such as in wrap accounts. Your broker might recommend you a wrap account stating that the account only has a 1% fee, while forgetting to mention all the other fees you’ll also be responsible for such as expense ratios and transaction costs of the funds within the account.

3. I Can’t Beat the Market

There have been many recessions in the past 50 years and many more to come in the next 50, your broker did not foresee any of them nor will he/she ever be able to predict where the markets are going in the future. However they will try to impress you with graphs and bar charts.

4. Those Letters After My Name Don’t Mean Much

There are dozens of different designations advisers use these days, besides a few (CFP, CFA, CLU, ChFC) most other designations don’t mean anything other then the ability to pass an exam. These designations are designed to imply competency and authority, however often they aren’t worth much.

5. I May Not Be As Knowledgeable As I Pretend

Remember that a broker is a salesperson first and foremost; their primary job is to sell you a product. There really aren’t any educational requirements for becoming a broker, other then passing a licensing exam. Sometimes brokers will use jargon and fancy graphs to imply a high level of expertise, however often you’ll find you know just as much as they do, if not more.

6. Don’t Buy Mutual Funds with Loads

Mutual funds are often a large part of your broker’s book of business, because their trailer fees provide a continuous stream of income. Your broker will always sell you a mutual fund with either a back-end load or a front-end load (in back-end load you pay a fee when selling before a certain time period, while in front-end load you pay the commission up front and can move around anytime.), however the same fund is  almost always available as a No Load fund.

7. I Have Other Incentives To Sell

Almost every brokerage awards their top brokers with extravagant trips, cruises or cash rewards. These incentives can easily cloud your brokers recommendation, however very rarely will a broker disclose these possible incentives to clients.

8. I Have a Quota

The best investment strategy is to buy and hold, however since this strategy does not generate any commission it often is not in the best interest of your broker and his/her firm. Your broker will often try push a new product on you to generate more commission and meet his quota, even though this may not be in your best interest.

9. If You Don’t Hear from Me, Be Worried

A good financial planner should get in touch with their clients every quarter to ensure their situation has not changed drastically. If you do not hear from your broker for a while, it is not a good sign. Brokers don’t like to contact their client’s with bad news.

10. If It Sounds too Good to Be True, It Probably Is

Anything else you’d like to add to our list?

9 Responses to 10 Things Your Broker Won’t Tell You

  1. Ray
    You do people a couple of disservices with these comments.

    Why do you mix the terms ‘Broker’ as stock broker with advisor and financial planner? They are entirely different.

    Why do you belittle designations–when good quality, honest people work their butts off to obtain them?

    CFP designation is international with specific standards of competency recognized around the world.

    A CLU designation means someone has a high level of competency especially in regard to Estate planning. Anyone who arbitrarily states they have no worth is ignorance of the facts.

    To holds these designations the holder must upgrade with them each and every year. And who would a client rather deal with the guy who couldn’t pass the exam or the guy who could??

    Does your doctor stay in touch with you quarterly? To make sure your health hasn’t changed? Does your Lawyer phone once every 3 months to check on you legal situation? Folks have to take responsibility and be proactive and be involved in their financial planning. It is up to them to let their advisor know if a material change in their situation has happened.

  2. There really isn’t a lot of difference between brokers and advisers, almost every brokerage firm calls their brokers “Financial Advisers”. I have tried to avoid including financial planners in this as I believe TRUE financial planners are an important part of financial planning.

    As far as designations are concerned, I have specifically excluding CFP, CLU and other important designations, there are just too many designations brokers use these days. Although just because someone has a CFP designation doesn’t mean they are not a salesperson.

  3. Ray I really don’t understand what point you are trying to make — that people should seek out advisors with NO designations! To avoid salespeople?

    Ask the people who dealt with Jones out in Quebec — he didn’t have a designation or even a license he just ran a Ponzi scheme for 25 years. He never sold anything people approached to buy his services.

    You feel there are too many designations. So do I. So why not advise people to stick to the proven international designations CFP & CLU.

    Only a CFP can call themselves a Certified Financial Planner. It takes a lot of time and effort to become one.

    That CFP exam you disregard — is 6 hours long with a minimum passing grade of 70% — I know I have proctored several sittings.

    A ‘True’ Financial Planner has two abilities — 1) to analyze, understand and express to the client the correct solution to their problem. 2) the ability to provide the product. (IE sales)

    Sales of the correct product to solve the client’s financial issues are an integral part of financial planning. And what is sold to the client had better the right stuff — because financial planners that do that — can and are held accountable for the recommendations.

  4. I have nothing against CFP, CFA, CLU or other designations I have excluded above, the issue is that there are too many designations that are not worth anything (excluding the ones mentioned).

    Also just because somebody has a CFP, it does not mean they are not just a broker trying to sell you something. I understand that CFP takes a a lot of effort and time (I was working towards one before my career change and doing CFA instead).

    I often advised others to seek fee-based planners with a CFP designation, however clients should always be careful and do their background checks.

  5. As a CFP, I certainly endorse seeking out my peers with this rigorous credential. Of course, as with anything in the world, there some great providers and some not so great providers. Credentials are a start, but you should always conduct thorough due diligence and feel good about who you are working with, especially when you personal finances are involved.

  6. No. 1 is big. From what I’ve seen, if you have one broker with 20 clients, you’ll have 20 portfolios that are practically identical, with the same stocks and the same allocations.

    The brokers seem to be selling a portfolio model more than a portfolio of relevant investments. It can’t possibly be true that one size fits all when it comes to investing–you wouldn’t have a 30 year old with the same portfolio as a 70 year old, but that’s what often happens.

    If you could get a hold of the company’s portfolio, you could build your own, if it works for you.

  7. You need to make the distinction between brokers and registered investment advisors (RIAs). An RIA is subject to a fiduciary standard. By law he is required to act in the client’s interests. An RIA has an ADV filed with the state and possibly the SEC. A broker’s allegiance is to the firm and to the shareholders. If the firm has securities it’s having a problem selling it will increase the broker’s commission to move those securities. The bottom line is that you should only use an RIA in an advisory capacity-period.
    Readers may be interested in the following post:

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