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Brokers vs. Newsletters (Part 1)

Tuesday, August 28, 2007 | Jason Jovine

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Hey, Tycoon reader, yeah I’m talking to you.  It’s Jason Jovine here.  No, you're not schizophrenic (I think).  You are really hearing my voice in your ear.  I want to ask you a question:

Where do you get your investment/trading advice from?

More importantly, since we can’t cry over spilled milk, where will you get it from?  No, really, this is a very serious question.  Who will you trust to tell you where to put your money?  Er, WHOM will you trust?

I will tell you what an ex-girlfriend told me to do a while back when making a decision.  She told me to do a “PMI” (Pluses, minuses, and interesting).  In other words, figure out the pros and the cons of each decision, and then do what is best for you.  Let me break it down for you.

Brokers (i.e., Financial Consultants)

PROS

1.    You have someone to yell at and blame when your stocks are down.  Since they are the ones who probably gave you the idea, you can “hold them accountable,” so to speak.

2.    You have someone to hold your hand and keep things in perspective for you.  In other words, a good broker probably has years of experience, and when you are having that “anxiety attack” when the market goes down 200 or 300 points, he or she can help you keep things in perspective and prevent you from making stupid mistakes.

3.    If you have an account with a broker, this person, of course, works for a brokerage firm, and that firm may have many good products and services (e.g. hot IPOs) that you would only be able to get by having an account with a broker there.   Brokers usually take the best care of their best clients.  In other words, if you have a nice amount of money with that broker relative to the other accounts that he manages, he will probably try harder to get you some of the good products that the firm comes out with.

4.    You have someone to help educate you.  A good broker, like a good doctor or anyone else who is a true professional, will take the time to help you understand what is going on instead of just giving you short, meaningless answers.  What you learn from a good broker will stay with you for the rest of your life.

5.    A broker could fight to get you better prices (i.e. executions) on trades.  In other words, a good broker will act as an advocate for you and will fight to get you the best price possible on the stock, ETF, or any other trade or investment that you make.

CONS

 1.    A broker can charge you an arm and a leg.  Theoretically speaking, a broker is “allowed” to charge you up to 5% of the contemporaneous cost of a transaction.

In other words, if you buy 1,000 shares of a $10 stock, a broker theoretically can charge you up to $500 for this trade (5% * $10,000).  When I say "contemporaneous," I mean that the 5% is on the overall trade.  In other words, if you sell $10,000 worth of stock through your broker, and he puts that $10,000 into another stock on the same day, he can charge you up to $500 (5%) in total.

Maybe he will charge you $250 on the sell and another $250 on the buy.  Or maybe he will charge you $500 on the buy and nothing on the sell.  This is his call, but he can not exceed 5% on that $10,000 wherever the money goes on that particular day.

This 5% rule is more of a guideline than a strict rule, but rest assured that brokers do not dare cross it (smart ones, at least) because they do not want regulators looking too closely at them.
 
2.    A broker’s motives may not be the same as yours.  A broker may be pushing his firm’s inventory to you just to get a commission when there may have been a better place for you to put your money.

He may “churn” your account.  'Churn' means that he may trade just for the sake of trading to generate a commission.  This is, of course, if your account is set up to be transactional in nature.  In other words, if the broker only gets paid to buy and sell.  This is where he may have an incentive to trade unnecessarily.

If it is a “wrap account”, then your account may just collect dust because he gets paid a percentage on your account every year no matter what happens.  So why should he try to stress himself out to get you the higher returns?  The work that this would require from him is not worth it to him.

The best advice that I could give you is to set your account up as a “hybrid” (part wrap and part transactional in nature).  The percentage that goes into which type depends on your own unique needs.  As always, make sure to ask questions often, and stay on top of your account.  No one cares about your money as much as you do.

3.    Brokers, especially at “wire houses” (e.g. Merrill Lynch) have their hands tied to a certain extent.  These firms have so many rules and regulations regarding how these brokers can trade their clients' money that they end up just settling for mediocre returns.

In other words, many firms want their brokers to just be “cogs” in their gigantic money machine.  Creativity is stifled in this type of environment, and as a result, your investment returns may suffer.

4.    A broker may pressure you to refer him to friends, neighbors, business associates.  The hardest part of any business including that of a broker is to get new clients.  The broker will argue that the more clients he has, the less time that he needs to be out there looking for new ones and hence could spend more time doing research and other high end tasks so as to produce better returns for his clients (like you).

I don’t think that there is anything wrong with giving him or her referrals after you have been a client for a long time and after he has proven that he is competent and trustworthy.

I remember like it was yesterday a story of a guy who recommended his broker (that he had been with for just two weeks) to his next door neighbor.  The broker stole money from both of them, and the next door neighbor ended up suing the guy who recommended the broker to him.  SO BE CAREFUL!


I will tell you next week what the pros and cons of using a financial newsletter are, so stay tuned.

Until the next time, folks, spend your hard-earned money wisely.


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Jason Jovine
Contributing Editor
The Tycoon Report




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18 Comments

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  1. Sharon (1 year ago) Is this Spam?

    Oh, so true, lost 25% of my investment monies because he talked me out of my decision to exit an option trade. When my trade was up above my strike price by $6.00, before expiration, I called my broker, told him I wanted to exit the trade, he talked me out of it and boom, within a matter of 2 days, it plummitted to below my strike price and I lost it all. Boy, was I upset. Since I had already lost most of my investment money (75%) to his recommendations, that was the last straw. Other than the last option trade still open, I have taken out the rest of my monies and am going to have to wait until I can save some more before I can start again.



    My fault, I let him do this instead of taking charge of my own account. A lesson learned indeed.



    Take charge, folks,



    Sharon

  2. jester112358 (1 year ago) Is this Spam?

    I think you make an excellent case against using full service brokers. I imagine most people use an on-line electronic broker. A good one (e.g. Fidelity) will always get you the limit prices you set and well as executing more complex conditional trades. I'd be interested in knowing what fraction of the readers of your newsletter use full service brokers? (Maybe a survey) It sort of goes against he spirit of learning how to invest one's own funds and thus control your own destiny. I've read that over 90% of professional underperform typical market indexes such as S&P500.

  3. Josephine P (1 year ago) Is this Spam?

    These articles are too long.

  4. jeff (1 year ago) Is this Spam?

    how very true

  5. claudia a (1 year ago) Is this Spam?

    When I first started trading, some years ago, you could ONLY do it with a broker. I recall the fee was 8% Then Mutual funds became available directly so I left the one I had. But signed on again when i wished to benefit by the UK's new privatisations. Only through brokers.

    But, I chose wrongly because, eing female i was taken in by the "nice" broker who then proceeded to sell me other things which generally lost money. The last straw was being persuaded to buy into a Housing Partnership which he advised me was government sponsored. But, IT was NOT and he then advised me it was supposed to be sold only to people earning over |200.000.00 a year. I certainly was no where near this but "oh you are so good with money!" With no clue as to the meaning of a partnership I ended up losing all plus paying someone to do my taxes when it was all gone, to find I still had to pay taxes????

    I left this broker and became so delusioned that i now handle everything with online brokers.

    However, I do keep a small, very small IRA with a large broker who NEVER tries to sell me anything. I usually call up with an idea and he researches it for me. Of course there is a big fee, but the help is worth it. I for example, led him to KMP and a few others-some good some bad.

    So, I have had the good and the bad and understand your article very well.

    And thank you for a good financial education.

  6. Michael O (1 year ago) Is this Spam?

    Greetings,



    Years ago I learned the blunt truth about brokers really being sales people with no special talent or interest in making profitable stock purchases. Also, broker managers care more about which employee is making money for the brokerage firm, not who is making money for their clients. Infact, those two goals can definitely be at odds with each other.



    After my new brother-in-law broker lost a significant amount of money on a stock purchase in my account, I confronted him about what had happened. He smiled a wry smile and said, "Well, I never really wanted to be a broker in the first place. My degree is in English and my goal is to become the writer of children's books or screen plays"



    I just about levitated out of my chair!



    Nobody is as interested in the proper management of your money as you are, especially if you have gone through the natually filtering process of becoming a Tycoon Subscriber.

  7. Charles F (1 year ago) Is this Spam?

    I'm just wondering what your PMI girlfriend had to say when she took something serioisly that you had poked at her in fun & came up pregnant..........CF

  8. frank w (1 year ago) Is this Spam?

    Brokers are salesmen. Sales and comissions ALWAYS first - - with them and the brokerage company. If you make money, they want you to believe it is their advise. If you lose money - - well, that's just your bad luck That's the way it goes. Brokers are not professional -- they are salesmen.

    Only fools pay full brokerage comissions. Go online and do own research. Listen to brokers and you will soon be " broker "

  9. Ken L (1 year ago) Is this Spam?

    Good article, I've never used a broker, but I've heard all the stories from newsletter writers. It really seems theres a conflict of interest, kind of like buying a house from a real estate agent. They're only there to make a commision, not to find and alert you to all the faults. They really work for the other guys.



    Newsletters, however can be very good. The hard part is finding the ones that fit. Its easy to get overwelmed with to much information, or the wrong kind of information for you, especially when first starting out. I started with newsletters, and I've been at this for a couple of years, and I've kind of figured out what I like, its not a quick process. There are many good ones and many not so good ones. You really need to be brutaly cutthroat, and eliminate even good ones that dont fit your goals.



    The best thing about newsletters is, they are working for you, they also work for their publisher, but again he works for you. Without you they dont get paid. If they screw up to often, if they give you bad advice, if you dont like what they say, or what they forget to say, you can simply go somewhere else.



    The bigest problem I see people haveing with newsletters is, they think theres some kind of sure trade. Many newsletters over hype their stock picks, new investors and even some experienced ones, get sucked in and over invest thinking its a sure thing.



    Now, as to your first questions, where I get my advice, and whom I trust. I no longer follow newsletters closly, most talk too much. On the other hand most trading services dont give you enough to go on. I absolutly hate trading services with intra day alerts and weak analysis.



    As to what I do like, and this is very subjective to my trading style. I've found that I like to trade trends with a 2-10 month time frame, a good rate of change, and a solid support line, I like a good range with a 2-10 week time frame that I can trade within.



    To find these, I like Zacks.com, premium membership, I like to use the Zacks rank and screener, I like the predefined lists they compile and the highlights that they publish for free every day, and their equity dept's analysis. I also like to use the MSN StockScouter rating system, they often pick up fundamental details that I miss.



    One stock finding service that I havent tried yet, that I've heard great things about from freinds, is VectorVest. I know some people who have used this for quite a while, and claim it as a primary tool.



    My primary method is chart analysis, and my primary tool is TeleChart. All the rest is supporting information, as much as I like to check and rely on this kind of information for support, I could easily trade without it. I can scan and sort my lists on TeleChart, and the rest just comes down to money management and trade management. If you can cut, or otherwise limit your losses, and let your winners run, you've won the game, no matter what method you use.



    Ken

  10. Bruno L (1 year ago) Is this Spam?

    well written and valuable advice.

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