The Broker’s role in investing.

Hi there,

What should be the broker’s role in your investing decisions?

It would be better if you can limit your broker’s role to executing your orders .This is not to undermine their importance. But, i feel that’s where it should end. Because, your broker makes money through brokerage targets achieved through securities transactions. He does not make any money from setting up a long-term financial plan for you. Since a fee is charged whenever you buy or sell,the more you keep buying and selling – the more he makes money. Knowingly or otherwise, the broker/relationship managers will be more interested in generating the target brokerage. This is the reality. Your broker may NOT be required to act in your best interest and you may be receiving dangerous advice that could cost you a fortune.

Why? –Because, brokers don’t have fiduciary responsibility.

Most people using stock recommendations from brokers expect the broker to recommend appropriate investments so that it improves their portfolio’s performance. Underlying these expectations is the understanding that they will act in the best interest. The legal term for ‘acting in your best interest’ is called fiduciary responsibility. For instance, if you set up a trust for your child and name a trustee to oversee that trust, the trustee has a fiduciary responsibility to act in your child’s best interest. If they don’t, they can be taken to court and be held liable for their actions. A common misconception among investors is that their stockbroker has this fiduciary responsibility. They don’t. That’s why following their advice can be dangerous.

Want more proof? – read the fine prints.

How did you start your de-mat account? You just placed 32 odd signatures on that 60 page booklet. Isn’t it? Did you read that whole thing? Most probably- No. If you go through those paragraphs, you will realise that –You are solely responsible for all investment decisions and trades even if you have accepted the broker’s call.

Who gives you market tips? Your broker or analyst?

Here’s the reality- Most of the time, the guy who gives you market tips is the employer of the broker. They are given general ‘market tips’ every morning by the main broker which they blindly tell to all their customers- without considering the risk tolerance capacity, age, equity or profile of the customer. That’s the exact reason why there are more losers in the market. This is not to say that researches done by brokers are not good, but those are general advices.

Understand the difference between a broker and an analyst.

At this point, it is also very important to understand the difference in role between a broker and a stock market analyst. An analyst literally analyzes the stock market, and predicts what it will or will not do, or how specific stocks will perform. A stock broker is only there to follow your instructions to either buy or sell stock and not to analyze stocks. Broker’s target is to earn their money from commissions on sales. So when brokers themselves double up as investment advisors– there is some danger in it.

CONCLUSION

Being with the right broker is critical. It can mean making money for yourself with your trades, or end up you making money for the broker. Ideally, brokerage should assume importance only when they threaten to eat up a significant chunk of your profits. This would be a problem more relevant to day traders than the long-term investors, who, in comparison, might trade occasionally. High-volume traders can consider negotiating their commissions with brokers. Alternately, such traders can also consider flat fee broking products, which charge fixed brokerage for a specified period, irrespective of the frequency or value of transactions. This ensures a limited trading cost even as traders enjoy the broker’s services and advice. A good investor should be more concerned about the quality of tips and advices he takes, rather than negotiating on brokerages.

So, If you are seeking advice on balancing your portfolio, then you need to look for an investment advisor (sometimes called a financial planner), who will charge a fee for drawing up a total financial plan for you. The financial planner may work out a strategy to manage your securities holdings in harmony with your total financial plan.

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