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Confessions of a Broker - Dirty Little Secret #1
Now that the Stock Market seems to be gaining some traction, individual investors are starting to come out of the closet and show some interest in getting back in…
As you might know, I’ve spent over 20 years in the investment management business and have worked for some of the biggest most well know brokerage firms on Wall Street.
Most individual investors will turn to a Full-Service Broker to help guide them back into the market. The biggest issue they will face when engaging with a new advisor is they become entangled in a complex mesh of conflicts of interest that has existed forever in the industry.
Well, if you are one of those investors getting ready to dip your toe back into the market, I thought I would share some things you should know about your broker. These are the Five Dirty Little Secrets Your Broker Doesn’t Want you to Know About their Business.
Now before I start, I want you to know I’m going to take some heat from my friends that are still in the business. This in no way shape or form is a reflection on the way they run their financial advisory practice. Every one of my friends in the industry has been enormously successful and I would highly recommend any of them as a Financial Advisor. This article will do nothing to hurt their practice as I know none of them are guilty of what you are going to learn.
Now that I’ve got my disclaimer out of the way, let’s get into the Five Dirty Little Secrets.
Dirty Little Secret No. 1
I was not hired for my expertise on the investment markets, but I was hired for my people skills and charm…
When I interviewed for my first job as a Financial Advisor with one of the most prominent firms on Wall Street, the firm was very clear that if I wanted to become a stockbroker, I better understand that my job is to sell not follow the markets. Point being, the skill set that qualifies a person to be a broker is nothing like what the public perceives. You are more likely to become a broker if you were successful selling used cars than if you have a financial-analysis degree.
Successful Brokers need to be polished and have good persuasion skills. They also have to be thick-skinned, aggressive, capable of dealing with rejection and good at coercion. Knowledge about financial products comes much lower on the list of traits hiring mangers look for in brokers.
Understand something. When you become a broker, the firm does not hand you a client list and assets to manage. Your only job is to “build your book of business”. People that want to “read the charts” and study the “fundamentals”, typically do not make great salespeople. Remember what I said earlier – my job was to sell, not study the markets.
So here is the real issue at hand. Brokers that are not passionate about the markets and are directed to sell financial products they don’t truly understand can lead to huge disasters. For example, during the credit bubble, thousands of investors bought products called Auction-Rate Securities from major brokerage firms like Merrill Lynch, Deutsche Bank and Citigroup, thinking they were relatively safe alternatives to money market funds.
When the markets for these securities froze during the credit meltdown, investors could not get their money out. Outside of illiquidity, the biggest problem was the brokers that put their clients’ money into these instruments, really didn’t understand the investment. Unfortunately, examples of brokers pushing products they don’t understand — with disastrous results for customers — pop up all the time.
So what do I do?
When I was a broker, I was given some great advice from one of the largest producers in our firm. He philosophy was everyone wants “A+” clients. The best think you have going for you as a new broker is there are a lot of “C+” brokers chasing those “A+” clients. So his advice was simple. Be passionate about your business and work hard to become an “A+” broker. Make sure you know more about the investment world than the client you are seeking. If you accomplish this, the “A+” clients will find you!
So I will pass the same advice along to you. Make sure you take the time to become an “A+” client. Study the markets. Educate yourself on what you’re investing in. There is nothing wrong with using an advisor. Just make sure you have educated yourself enough to challenge them. Be sure you read all the paperwork and fully understand anything and everything you are investing in. If it seems too complicated and your broker cannot clearly and simply explain it to you, stay away.
The Market Timing Academy