3 things top stock brokers never do

top stock brokers

Top stock brokers and portfolio managers provide you with ethical and conflict-free advice—and here are three things they won’t do.

A good stock broker (the brokerage industry typically prefers the term “investment advisor”) can provide a cost-effective way to manage your investments. However, finding these top stock brokers has always been difficult. We mainly hear about these top brokers after they’ve retired, when investors compare them to the bad brokers who have taken over their accounts.

As any good stock broker or experienced investor can tell you, bad brokers are all too common. By “bad brokers,” we mean those who put their own interests above their clients’. Keep in mind, however, that most bad brokers do this in a perfectly legal fashion, by catering to their clients’ whims and weaknesses.


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Here are 3 practices you’ll never see from top stock brokers:

1. Double dipping

Some brokerage firms offer portfolio management for a yearly fee of perhaps 2% or so of client assets, rather than charging trade-by-trade commissions. This is supposed to eliminate a conflict of interest over commissions between the stock broker and the client. But it’s not always an especially attractive arrangement for the investor. After all, brokers and their clients have a variety of conflicts of interest, apart from those related to brokerage commissions.

Top stock brokers won’t turn fee-based accounts from a bad deal into an abusive one by loading them up with securities that generate additional income for themselves and their employers.

These securities include in-house mutual funds, or any funds that pay trailer fees. New issues are another big earner for the stock broker and his firm; the company that issues the stock pays the commissions of 5% or more, but ultimately that money comes out of the investor’s pocket.

Fee-based accounts are also a convenient market for securities that the brokerage firm has in inventory and wants to unload. The firm may have bought these securities to accommodate a larger client who was eager to sell.

Top stock brokers and portfolio managers go the extra mile to dispel any conflicts of interests. They offer ethical and unbiased investment recommendations while keep the investors long term goals in mind.

2. Aiming for stability rather than growth

In response to the losses they suffered in the recent stock-market downturn, many investors have become much more sensitive to risk, or even to fluctuations in the value of one of their investments. Bad brokers have responded to this fear with supposedly sophisticated strategies that bring great portfolio stability.

However, this kind of stability costs money. It can virtually eliminate any chance of a significant long-term profit.

Some of these stabilizing but profit-killing strategies involve buying or selling stock options. Others focus on “structured investments” (see warning sign #3). Now that stock brokers can also sell insurance, many bad brokers have begun to focus on high-fee insurance products like Universal Life.

Top stock brokers have no need to offer schemes and services to their clients. They offer clear strategies and straightforward advice that serious investors find refreshing.

3. Stressing low-risk, low-return, high-fee structured products in client accounts

These are created when brokerage underwriting departments take genuinely desirable securities and slice and dice them into what you might call Frankenstein investments. These investments come with special characteristics that make them superficially attractive to investors, yet far more profitable for brokers. A good example is principal protected notes where returns are tied to a stock market index.

You may not lose much money buying these investments. You may even make a few dollars. But it is certain that these investments will generate big underwriting fees like any new issue, followed by a string of management fees. When the structured investment gets redeemed in five or seven years, or sooner, the broker gets an opportunity to sell the investor something new.

After commissions and other fees come out of these investments, there’s little chance that investors will wind up with a profit to match their risk.

Top stock brokers seek to make their clients life easier and most importantly, more profitable.

Our portfolio management advice: If you don’t want to invest on your own, then we think you should seek out top stock brokers and portfolio managers and develop a trusting relationship with them. Aim for individuals that focus on investment quality and diversification. At any given time, lots of prosperous, well-established companies are out of investor fashion. Some of the biggest profits you ever make will come from buying these stocks before they find their way into the limelight.

If you’re looking for authoritative advice on investment issues—including portfolio management—or fundamental analysis of investments you’re considering buying, you should join Pat McKeough’s Inner Circle. Inner Circle members always get clear, concise investment advice that’s 100% independent, and untainted by commissions or other undisclosed influences.

Have you received less than ethical advice from a broker in the past? Share your experience with us in the comment section below.

Note: This article was originally published in June 2009 and has been updated.

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