Every day
some investors make money and some investors lose money by investing in stocks, bonds,
mutual funds, options, commodities, limited partnerships, insurance products and so on.
Risk is a part of every investment. There truly is no such thing as a free lunch. You
simply don’t get the chance to make profits from investments without taking the
chance of losing your money, without taking at least some risk.
Not every broker, financial consultant or
planner is deceptive or dishonest. There is such a thing as losing your money “fair
and square” and it happens all the time. A lot of good ideas don’t work out the
way we thought they would. Just because you lost money doesn’t mean it’s your
broker’s fault. Or yours either! Be honest about it; if you caused your own loss, or
if no one caused it, why should your broker have to pay for it.
Who cares!
Right now, you’re the only one who cares
that you lost money. But if the loss is really your broker’s fault, he should be
worrying about it—not you! And not only should he be worrying about it, he should be
paying you back. And that’s just what we’re going to help you do, get your money
back.
But is it your broker’s fault? To answer
that, you need to understand a bit about how the brokerage industry really works. What are
the rules? Who’s on whose side? Who is supposed to do what?
The dream & the nightmare
You had some money in the bank. You
didn’t need it right away. You were saving it. It was for your retirement. Or it was
for your kids to go to college. Or it was to buy a house. Or whatever. It was safe there.
You could take it out any time you wanted.
But with interest rates dropping it
wasn’t growing very fast. You saw the ads. Come grow with us. Bring us your future.
We’re bullish on America. We make money the old-fashioned way—we earn it. When
E.F. Hutton talks, everyone listens. Thank you, Paine Webber.
Everything is beautiful
In the perfect world of the ads, you describe
your financial needs and objectives to an investment professional. This professional
(financial planner, stockbroker or consultant) recommends investments suitable for you. He
looks at all the possible kinds of investments, each with its own chance for gains and
possibility of losses. He matches them to your amount of money, your ability to take risk
and your goals. Both of you will make money; you on the good investments, he on the
commissions. That is the dream.
That dream world is how the investment
industry presents itself. It is how the government wants it to be. And it is how a lot of
investors think it is. There’s just one slight problem with this rosy picture. It
gives you the impression that you and your broker are on the same side, that the only way
he’ll make money is if you do and vice versa.
I thought you were on my side
Unfortunately that is not the case. You and
your broker are not on the same side. There is a basic conflict of interest in the
broker-customer relationship that won’t go away. Whatever his title (we’ll use
the term broker in this book) the investment professional with very few exceptions is a
salesperson. Simply stated, a salesperson makes a living from the commissions or other
sales compensation involved in buying or selling securities and financial products.
There may be no more than a $50 service charge
to the customer to buy a $100,000 U.S. Treasury bill or bond. There may be a $4,000
commission from selling the same customer a U.S. Government Securities Mutual Fund
involving the same amount of money. Therein lies the basic conflict of interest. Which of
the two do you think most commission-paid brokers will recommend? The reality is that in
the broker’s mind, it is much more important that he send his kids to college than
for you to send yours.
What’s more, in our experience, there is
a direct relationship between the safety of an investment (or investment strategy) and the
commissions charged. Generally, less liquid and higher risk investments carry higher
commissions. A risky and hard-to-resell “junk bond” has a higher commission than
a high-grade utility bond. When a new company first goes public, its stock has a higher
commission than it will later when it starts trading on an exchange. Trading stocks
generates many more commissions than a simple buy and hold strategy. Higher commissions
are generated by selling more complicated packaged products than plain old blue chip
stocks and bonds. Which of the two do you think most commission-paid brokers will
recommend? The reality is that in the broker’s mind, it is much more important that
he spend his retirement in comfort than you do.
And, there’s no commission on this
And by the way, just because you don’t
see something called a commission doesn’t mean the broker wasn’t paid. Terms
like spread, service charge, fee, sales credit, concession and so forth are all money
going from your pocket to the broker’s pocket—just like commissions. Remember
the duck rule; if it walks like a duck and it talks like a duck, it is a duck. So
if your broker told you there was “no commission”, you should have
“ducked,” not because he was getting paid, but because he was trying to get you
to think he wasn’t.
So what is good for the broker is not
necessarily good for you. The truth is that the broker client relationship is a constant
temptation to the broker. Some brokers never give in to the temptation. Some will take
advantage of you (particularly if you are inexperienced and you’re not paying
attention) but technically never break the law. And some break whatever laws stand in the
way of their pursuit of your money.
Although compliance with the securities
industry’s ethical standards requires “fair dealing” with customers, in the
real world we all live in, the battle lines are drawn; it is truly a conflict of interest.
Your knowledge, experience and most, of all alertness, are matched against the
broker’s sales pitches. Now that you understand the conflict of interest, let’s
look at some of the actual schemes brokers use to separate you from your money, how they
practice “fair” dealing.
Part 2 