Don't Trust Your Broker

Email
    Text size
Author Image for Shah Gilani

I've written about the dangers of relying on stockbrokers before.

You see, most stockbrokers aren't traders, and they aren't analysts, but salesmen. They usher clients into financial products with little regard for their individual financial situation or the broader markets.

That doesn't make them bad people. In fact, I have friends who are stockbrokers, and they're nice people.

These friends of mine are trustworthy and try hard to make their clients money. But at the same time, I would never let any of them handle my money, not even a small portion of it.

That's why a new analysis published in yesterday's Wall Street Journal really grabbed my attention...

According to the Journal, some stockbroker misdeeds - including financial crimes and other serious felonies - aren't always disclosed to their brokerage house employers, or to the Financial Industry Regulatory Authority.

What you don't know about your brokerage business could hurt you...

The Truth About the Brokerage Business

The problem with most brokers is they aren't that smart... they just think they are. They think they know the market because "that's their business."

But most brokers really don't know squat. They ask you about your investment objectives and finances and what your hopes and dreams are in order to slot you into one or several of the categories. From there, they come up with an investment program "just for you." Only it's not just for you... it's the same program they shoehorn other clients into because they fit in that box, too.

They may sound like they know what's going on in the market, but that's because they watch CNBC and FOX Business to get their "market color" from the analysts and big money managers who guest on those shows.

If you watch those shows and read the Journal or other financial dailies, I guarantee you'll know more about what's going on than most brokers do.

That's because brokers aren't analyzing investments and the market for you. They're out trying to sell new prospects on becoming clients based on their market knowledge. And those "just-for-you" investments are designed by the analysts and "portfolio managers" the big brokerage houses employ to structure programs that are just specific enough to meet clients' expectations and give the illusion of personal service.

You're a cog in a great big machine at great big brokerages. Your broker is a tool, and not the good kind.

Brokers are a sad lot. They don't know what they don't know, but tell you what you should do with your money. It's scary.

But that's not the half of it.

These Bad Apples Can Be Rotten to the Core

What's even scarier is that too many brokers are bad apples with suspect pasts.

And that brings us to what The Wall Street Journal revealed this week.

The Journal analyzed 500,000 brokers in 21 states (there are 635,000 registered brokers spread among 4,000 brokerage firms in the United States) and found that more than 1,600 working brokers had failed to disclose important facts about their financial condition and problematic background histories (including serious regulatory violations).

What they had to report to their brokerage bosses on disclosure documents and to the Financial Industry Regulatory Authority (or FINRA, the self-regulating body that oversees the brokerage business, which itself is a creature of the Securities and Exchange Commission) are things like personal bankruptcies and criminal charges.

The Journal found that 150 of the 1,500 brokers they surveyed who hadn't reported reportable events didn't disclose charges and convictions for things like: burglary, forgery, larceny, theft, writing bad checks, identity theft, assault with a deadly weapon, stalking, sexual battery, false imprisonment, jumping bail, and drug offenses. After that list, personal bankruptcy seems like just a bad luck streak in dancing school.

These brokers were employed at big brokerage operations, places like Merrill Lynch, JPMorgan Chase, MetLife, Allstate, as well as smaller local brokerages like J.P. Turner, Trident Partners Ltd., and Newport Coast Securities Inc. in Long Island, N.Y.

And it gets worse. According to a new report by the Public Investors Arbitration Bar Association (PIABA), FINRA itself is omitting reported red flags from its BrokerCheck disclosure system. This includes reasons for termination, whether a broker has ever been under internal investigation for "fraud or wrongful taking of property, or violating investment-related statutes, regulations, rules or industry standards of conduct," personal bankruptcy, federal tax liens, and information regarding failed tests for industry exams. You know... the kind of thing you'd really, really want to know about someone giving you financial advice.

So it's not just that firms aren't digging deep enough to uncover any relevant pieces of a broker's past. They're actually ignoring information that's freely handed to them! It's enough to make you sick.

The brokerage business has a lot of good brokers, to be sure. The problem is finding them among the tens of thousands who are merely salesmen and women, not a lot different than the mortgage brokers who sold subprime loans to folks with no jobs or assets, or used car salesmen selling lemons as lemonade on a hot summer day.

My best advice: If you want to make money in the market, you've got to do it yourself. If you need help, get it from people who live trading and investing, not people who just talk about it because "that's their job."

Scary, right? If you want to read the WSJ article in its entirety, go here. Be warned, if you've got your money tied up in one of the firms listed above, this might come as a shock. It's not for the faint of heart.

- Shah

About the Author

Shah Gilani is the Event Trading Specialist for Money Map Press. He provides specific trading recommendations in Capital Wave Forecast, where he predicts gigantic "waves" of money forming and shows you how to play them for the biggest gains. In Short-Side Fortunes, Shah shows the "little guy" how to make massive size gains – sometimes in a single day – by flipping large asset classes like stocks, bonds, commodities, ETFs and more. He also writes our most talked-about publication, Wall Street Insights & Indictments, where he reveals how Wall Street's high-stakes game is really played.

... Read full bio