It is truly amazing how many people entrust their entire life savings to stockbrokers who know absolutely nothing or very little about investing. In their defense, many stockbrokers may be honest individuals who truly want to help their clients. However, the problem is that they were never trained to be investors but instead were trained to be salespeople, and they are constantly being pushed by their employers to sell. After being recruited by a brokerage company, they are subjected to intensive sales training where they are taught how to cold-call, prospect for clients, and counter various clients’ objections. The actual education on how to select and analyze particular investments is limited.
Stockbrokers are Trained for Sales, Not for Investment Research
Brokerage companies spend millions of dollars every year on training new stockbrokers. Because more than two-thirds of them leave the industry within a few years, the industry has become good at training and attracting the right candidates. They lure them in with advertisements promising unlimited income potential and high-end lifestyles. However, brokerage companies are not interested in just anyone – they want people who will sell. For example, they are not interested in hiring good investors because they want people who can sell their investment products and generate commissions. Good investors spend time researching and studying possible investments. From the company’s point of view, the time spent on researching is time not spent on prospecting and bringing in more clients.
After the training, stockbrokers are judged by their companies based on how much they can generate in terms of commissions and fees instead of the quality of the returns of their clients’ portfolios. They have to meet certain quotas such as commission amounts and the number of new accounts opened during particular periods. If they don’t meet them, they lose their jobs. The brokerage firms are also known for having sales contests where brokers compete for expensive vacations, boats, and TVs. The purpose of these contests is to generate high commissions by motivating brokers to sell, and to create a hierarchical system where some of them are viewed as superior to others. In this kind of environment, brokers are likely to focus on how much money they can make off their clients, not how much money they can make for their clients.
Investors Need to Educate Themselves
If people were aware of really goes on in the investment industry, they would think twice about whom to entrust their money to. Investing is not rocket science, yet it requires some basic knowledge. Unless people make investment education a priority in their lives, they will continue to be easy targets of an industry that is that is more concerned with its profits than the well-being of its clients.
Mariusz Skonieczny is the founder and president of Classic Value Investors, LLC, an investment management company. He is also the author of Why Are We So Clueless about the Stock Market? Learn how to invest your money, how to pick stocks, and how to make money in the stock market.