Is A Broker Worth His Price?
A recent survey found that 33% of Americans over the age of 50, could not grasp the concept of compound interest earned on term deposits. Half the respondents in the same survey, did not see the benefit of investing in more than one company on the stock market.
Our recent article looked at financial literacy in amongst teens. Australia may have some of the world's most financially literate 15 year olds, but the grown ups still have a bit to learn. Adults in Australia scored poorly with even basic financial literacy. Rather than learn how investments work, or ask questions, Australians simply trust financial advisers. This raises the question 'what do advisers really know?'.
The Australian investment community, is recovering from a major scandal involving misconduct by financial planners within their largest, and most trusted bank, the Commonwealth Bank of Australia. This has led to a Senate inquiry of the Australian Securities and Investment Commission (ASIC). The 'watchdog' is under fire for having let this happen.
The ASIC inquiry found that investors 'need to be educated.' and financial advisers, 'need higher educational qualifications'. Educating the general public may be a difficult task, but increasing educational requirements of advisers is long overdue.
Australian financial advisers can obtain the required diploma in less than a month there are no educational prerequisites. They just need to complete a short course which scratches the surface of investments, insurance, taxation and retirement planning. Passing the course is a matter of a few assignments and open book, multiple choice exams.
While writing this article, we spoke to an investor who agreed to share their recent encounter with a financial planner. As per their request, no names are included, but their story can be found here.
When you consider the years of university study that accountants and other financial professionals complete, it is disturbing that this simple course is all you need if you want to sell insurance and investment products. At makes it look like a glorified sales course in disguise as a professional qualification.
I recently caught up with a group of friends, and one of my conversations was about the stock market. The friend I was talking to is an experienced investor, and to the best of my knowledge has been successfully making a living from day trading for the past 4 years.
We talked about leverage, the benefits of derivatives and had a brief debate about the direction of a certain forex pair we both trade. The conversation caught the attention of some of our friends, who either quietly listened, or threw in occasional questions and opinions.
The group came to life when the topic of stock brokers came up. As a DIY investor, I want online access, with lowest possible brokerage. Fees impact the break even point of investments, so my goal is to keep them to a minimum.
I am happy with my online broker for shares, options and a margin loan, and an online CFD provider for my other activities (forex included). My agreed with my logic, but added, 'you also need a full service broker', and mentioned that he is currently looking for one who will 'give him good tips'. He is happy to pay extra fees on the portion he invests with this broker.
My opinion is that brokers should be viewed as over the phone sales people. They only make money when you trade. They make a slice of the commission on every trade, whether or not the investor is making money, has no baring on this.
My theory is that brokers will only recommend that you buy shares which have a buy rating within theirr company. If you ask for information on companies outside of this list, they will simply convince you to disregard that company and buy one on the list. Most of the major brokerages make their ratings publicly available, so why pay a broker when you can read the list yourself, and for a small fee, gain access to the full recommendation reports.
At this point we had divided the room into two teams. My team believed that brokers were not worth their fees. The other team believed, that they could provide added value, but you need to find the right one.
My friend sees brokers as qualified professionals. He feels it is their job to find sound investments and share this information with their clients. I see them as sales people closing enough deals to pay the bills. There is no incentive to help you make money, the only motivating factor, is generating trades, every phone call needs to be a buy or a sell trade. Who cares what stock, and who cares if the investor has won or lost.
If you had the ability to generate ongoing profits trading the stock market, would you quit your job and trade the market for a living, or would you get a job sitting on the phone convincing others to follow your ideas?
Want to know just how accurate stock recommendations are? A US based firm, CXO Advisory Group, has already looked into this for you. They studied the accuracy of predictions made by 'market gurus'. The results of their report are here.
If you wanted to 'share the wealth', would you launch a website and work freely from anywhere in the world, or would you find a desk in a loud office surrounded by sales people hungry for the next deal, while limiting your recommendations to 'the company list'.
My opinions since that day have softened, and if that same conversation were to take place now, I may be less harsh on brokers. At that time, I had just finished reading Dan Reingold's 'Confessions of a Wall Street Analyst'. An autobiography giving an inside look at the world of stock analysis in the late 90's. Dan was an exceptionally successful analyst who specialized in the telecoms during their dream run (which ended April 17 2000, with the 'tech wreck')
Want to read Dan's book? Links to both paperback and kindle edition are below :)