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Published: July 23, 2010
In recent years, there has been a tectonic
shift as Wall Street brokers leave their big firms to set up
shop on their own. Generally speaking, such a move is bad news
for the biggest clients as they are able to participate in hot
IPOs and other transactions, and they may lose that access when
a broker jumps ship. But for the rest of us, this transition is
good news, as the newly independent broker can simply focus on
your needs and not the big brokerage's needs. Big firms won't
always act in their client's interests. As we recently saw with
Goldman Sachs (NYSE: GS), when there is a conflict of
interest, the house always wins.
To make sure your broker is watching your back, keep an eye out
for these pitches.
1. "My analyst loves this stock."
If your broker is pushing a stock idea on you, it's at least a
few days old, and perhaps a lot longer than that. The best ideas
are first shared discreetly among the firm's most favored
clients, and even more egregiously, with the firm's proprietary
trading desk. Ever wonder how these internal trading operations
seem to make money, even when their clients lost money? Now you
know. And sometimes, a firm decides that its traders hold too
much of a certain stock. And guess who has been told to help get
rid of those shares? The broker. The solution: work with folks
who have zero conflicts of interest.
2. "We got this stock at a great price for you."
Your broker may have gotten you shares at $24, but his firm may
have only paid $23.90 a share. That may not seem like much, but
it's a hidden source of profits for the firm. Every "buy" or
"sell" order should have a trading ticket. And it's easy to
"assign" those tickets to particular trades. Electronic trading
has eliminated some of this abuse, but it still goes on,
especially at smaller broker-dealers. There is a range of high
integrity broker-dealer firms out there, but there are even more
firms that cut too many corners. To keep your broker honest,
find out what time of day a trade was made, and go back to the
intra-day chart on Google Finance or Yahoo! Finance to confirm.
Better yet, insist on real-time trade confirmations.
3. "We're getting in on this hot new deal."
Be wary of any offers of IPOs or other financial instruments
that are being sold in an offering to clients. Each deal comes
with a
prospectus that highlights the lead deal manager, and then
the supporting firms, known as the syndicate. If your firm is at
the bottom of that list, then stay away. Here's how it works: If
your firm just got their hands on some stock to sell, and the
deal is going to take place in a few days, then that's a sure
sign that demand was fairly weak, and your firm was brought in
at the last minute. That often means the deal is a dog. Hold
your nose and say "no thanks."
4. "You should buy this now. It won't be a good deal next
week."
Stock brokers are under the gun to generate trades. And their
supervisors will push them to meet quotas at the end of the
month or the end of the quarter. Don't feel an obligation to
take your broker's advice if his or her idea doesn't seem like a
good one and is coming at the end of one of these periods. I'd
suggest getting in the habit of declining some of your broker's
ideas when you first establish a relationship. See how those
ideas performed over time. If your broker values your business,
just explain that you'll accept more of his or her ideas down
the road, but have them keep telling you what they like right
now.
5. "Your broker just left, but we've got a better one to take
his place."
Huh? Where did he/she go? Why did he/she leave? Try to find
where that broker went and try to speak to him or her. They may
be prevented from candidly saying why they left, but their "body
language" over the phone should tell you everything. Brokers
often leave for basic reasons such as higher commissions. But
sometimes when they leave when the firm slips below their
standards of integrity.
Action to Take --> To
repeat, this is an industry filled with many bright, caring
people. But that doesn't mean that your needs always come first.
There's no need to assume that you'll always get the raw end of
any deal, but it's your right to develop a high level of
comfort. And that means honest communication and lots of
transparency. Don't settle for less.
-- David Sterman
Staff Writer
StreetAuthority |
