One Thing Every Investor Should Know About Their Broker

When it comes to building wealth, retirement planning, or any other endeavor involving money and investing, the person across the table from you - your broker - is not your friend.

He will tell you he is. She may even want to be your friend. This individual could be convinced they are helping people to achieve their lifelong goals. And they will almost certainly be friendly.

But, at the end of the day, the broker is a salesman, and his or her compensation is coming right out of your nest egg.

Now, I'm not going to tell you to "break up" with your broker or that they're a bad person; I'm not out to demonize the folks who sell investments for a living. Not at all.

In fact, it's in your best interest to continue your friendly association with your broker.

I'm telling you this because I want to level the playing field. So that next time you sit across from your broker, you're in control. Eyes open.

Ultimately, when you control that dynamic, you come out ahead.

Because you'll be able to go after the kinds of "unreasonably good" returns - 15%, 20%, or more - that can really make a difference in your life.

Why Your Broker Can't Be Your Friend

You and your broker have two fundamentally different objectives, as you'll see. I'd even go so far as to say you're working at cross-purposes.

NYC Financial District

Their incentives are not aligned with yours, and it is almost impossible for them to rationally act in your best interests. Expecting them to do so is like expecting the car salesman to care whether or not that souped-up, expensive sports car is the best idea for a married guy with four young kids.

Does this make them a bad person? No. They're just doing their job - and your broker's job is to collect your assets and get them into some sort of program that generates fees and commissions for his employer.

Everything they do up to the point where you sign on the dotted line is part of the sales pitch. Everything after that is customer retention.

MUST SEE: This is CRUSHING the market - 3,600% in total winning gains (including partial closeouts).

Still, I am not among those who think all brokers are evil.

Sure, there are some "Wolf of Wall Street"-types out there, but the average broker is a pretty decent human being.

Most of them are great people, in fact. They do great things in their communities, and many of them are civic leader types. They give to charities and belong to volunteer groups that do good things.

I should know: I was a broker for more than 20 years.

[mmpazkzone name="in-story" network="9794" site="307044" id="137008" type="4"]

I'm here to tell you.

They want to do well for you, but it's critical to understand that this is not their primary purpose. Their main objective is to do what just about everyone who works at a job does: build a better life for themselves and their families.

You see, in the investment business, we deal with risk - all the time. And brokers face one of the biggest risks of all every day.

That risk is career risk. Because the time and effort required to pursue higher returns are not in your broker's job description and, in reality, could cost them their job.

The whole process is based on "average" returns.

After all, your broker is just like you in many ways. She has a family, a mortgage, college expenses for the kids - really all the same costs and challenges you have likely dealt with all your life. Having a good life for you and your family isn't cheap, and it isn't easy, as you know.

Taxes have to be paid, making it all even more difficult. Being a financial advisor is a lucrative job, and her major concern every day as she drives to work is not to maximize your returns but to keep earning at a high level so she can do great things for her family.

And, of course, that's not bad or wrong. It's just human. Unfortunately, it'll be at your cost.

So the problem isn't some character flaw; it's that your broker was trained as a salesperson - not a money manager.

The Training Makes the Difference... and It Isn't Good

Brokerages - even elite ones - do not teach their brokers - excuse me, "financial advisors" - the essence of profitable investing; they teach them the sales process.

Oh, they might call it investment consulting and financial planning, but it's all just a sophisticated sales process. Those questionnaires they fill out and risk profiles they assemble help them to figure out what you will be willing to buy and to put together a pitch book to sell it to you.

It may be called a "plan," but, like I said, it is a sales pitch.

Even if your broker went to business school, they likely weren't taught about investing the way the way high-return giants like Warren Buffett, Seth Klarman, Richard Rainwater, Andy Beal, Henry Kravis, and David Rubenstein practice it.

They learn things like modern portfolio theory, the capital asset pricing model, and the efficient frontier.

These are all lovely ideas, formulated by very smart people who may have even made some money once in a while. But they're a ticket to ho-hum returns; they all but guarantee you'll never do much more than average as an investor... 5%, 2%, or even less.

Brokers (and their firms) are not there to help you learn and put into practice all the things that will help you earn high returns.

In fact, the whole process is based on "average" returns.

Why You're Supposed to Settle for 7%

Their mission is to earn around average returns so you do not get frustrated with them and take your money elsewhere.

Your goal may be a secure retirement, but theirs is maximizing the income that comes from your money and making sure it comes in the door, year after year.

It's all just a sophisticated sales process.

To accomplish that task, "average" is usually good enough.

See, helping you do the things required to earn high returns will cost your broker money. It can take a lot of time and effort to earn high returns. High returns are "lumpy" and holding your hand during periods of market volatility is time-consuming.

Broker

Finding and evaluating opportunities requires hours and hours a day, and that means less time for finding new clients and having them fill out their financial goals and risk tolerance forms.

It is much easier - and, for them, far more profitable - to deliver about-average returns that keep the fee stream coming in the door and leaves time to prospect for new clients.

And, lest you be tempted into thinking a discount broker is a way to make an end run around this fundamental conflict, let me tell you...

Even if you use a discount broker, you are not immune from all this.

Of course, I have accounts at two major discounters... and I get emails every day about trading platforms and techniques.

I get unsolicited information on... everything.

I get an occasional email about some new fee-producing index fund or outside management arrangement they think I might like.

My favorite? The firms that try to get me to switch by offering 100 free trades in the first year.

Good heavens, I probably won't do 100 trades over the next five years - I believe in finding high returns and holding those "unreasonably good" performers for as long as they work for me - so that's not a real incentive for me.

But you can see, these brokers want me to increase my activity... thereby increasing their revenue, whether it helps my long-term returns or not.

Most likely "not."

But still, it's worth repeating: Your broker is not a bad person. They are probably a fantastic person that would make an excellent fourth for your Saturday golf outing.

I have no doubt they'd be an incredible addition to the Thursday Night Book Club. I'm certain your broker is an exceptional person who is loved by family, friends, small children, and puppy dogs.

There's no two ways about it, though: When it comes to your (critical) quest to earn higher returns on your money to build the retirement you deserve, they are not your friend.

So, what can you do about it?

Be up front with them about your return expectations and goals, offer them the chance to rise to the level of performance you need. Their training may not let them see it at first, but it's in their best interests - their real best interests - to work with you as you target high returns.

And if they're not willing to come up to meet you halfway on this? Well... Let them know you'll see them on the links or at book club sometime.

Editor's Note: In the next few weeks, Tim will be back to show everyone just how they can target the "unreasonably good" returns - 15%, 20%, or more -  that Wall Street's top players enjoy. This is going to be big...

This Is a "Monstrous" Win Rate

Since April 21st, this man has helped Money Morning Members make more money than maybe anyone in history. To date, he's delivered 3,600% in total winning gains (including partial closeouts), and we expect him to continue this incredible achievement for at least the next 18 months. You need to see this...

Follow Money Morning on Twitter @moneymorningFacebook, and LinkedIn.

About the Author

Tim Melvin is an unlikely investment expert by any measure. Raised in the "projects" of Baltimore by a single mother, he never attended college and started out as a door-to-door vacuum salesman. But he knew the real money was in the stock market, so he set sights on investing - and by sheer force of determination, he eventually became a financial advisor to millionaires. Today, after 30 years of managing money for some of the wealthiest people in the world, he draws on his experience to help investors find "unreasonably good" bargain stocks, multiply profits, and build their nest eggs. Tim tirelessly works to find overlooked "hidden gems" in the stock market, drawing on the research of legendary investors like Benjamin Graham, Walter Schloss, and Marty Whitman. He has written and lectured extensively on the markets, with work appearing on Benzinga, Real Money, Daily Speculations, and more. He has published several books in the "Little Book of" Investment Series and a "Junior Chamber Course" geared towards young adults that teaches Graham's principles and techniques to a new generation of investors. Today, he serves as the Special Situations Strategist at Money Morning and the editor of Peak Yield Investor.

Read full bio