Myth #1: Brokers are trained in financial planning.
Becoming a licensed stock broker requires passing a standardized examination (called the “Series 7″ after the type of license it grants). This examination tests the applicant’s understanding of basic securities types (common stock, bonds, options), that he knows his responsibility toward his customer, and securities laws and regulations. A broker may take additional exams to gain additional licenses (to become a manager, or an options principal, for example). None of these exams, however, confer on the applicant a knowledge of how to help a particular customer attain his or her particular goals.
Think of these exams like driving tests–just because you can use your turn signal and parallel park doesn’t mean you can drive.
Myth #2: Any broker can sell you any investment.
They can, but many times they won’t. Many stock brokers are there to sell you something, that “something” being whatever pays the highest commissions, what their firm has in inventory, or whatever it specializes in peddling. It may be that concentrating on a particular product, be it municipal bonds, or REITs, or options, allows a firm to specialize. But what if you don’t want muni bonds, or REITs, or options, or it’s not the best thing for you? Once you’re in the door, many firms will sell you what they’ve got, not necessarily what you need.
Know who you’re dealing with before you walk in.
Myth #3: A nice title means a successful and knowledgeable broker.
Just because your stock broker is a vice-president does not mean he has climbed the corporate ladder. Brokerage firms are overflowing with vice-presidents. If your broker’s card says “Vice-president/Investments,” or “Senior Vice-president/Sales,” he is not a corporate officer, he is a good salesman whose commissions reached a certain benchmark.
And in line with no. 2 above, “good salesman” is defined by his bosses on the basis of commissions, not by you.
Myth #4: I can trust my broker because he’s employed at a big firm.
Surely a big firm has more at stake in protecting its clients; nobody wants bad publicity. Surely a big firm has lots of people watching out for bad brokers. Surely a big firm only hires the best… Surely we’d all like to believe these things, but that doesn’t make them true. Look at all the Wall Street scandals big firms have survived, and ask yourself why a complaint from you would make a difference. Big firms do have a lot of compliance people to look over stock brokers’ shoulders, but they can’t watch everyone all the time.
And while firms will tell you they only hire the best, they define “best” by that old measuring stick, sales.
To learn more about Steve Buchwalter, visit him at www.securitieslaw-attorney.com.