6 Reasons Why Your Stock Broker Is No Less Than Your Enemy

6 Reasons Why Your Stock Broker Is No Less Than Your Enemy

 

“I’m too busy from 9.15 am to 3.30 pm” he said, “working with multiple tools, advanced software and couple of screens, life is too busy to answer your calls”. She wondered, are stock brokers really that busy and occupied? Do they really work so hard that they can’t have a life on weekdays in trading hours? If so, shouldn’t all their clients be extremely successful, including themselves?

“If stock market experts were so expert, they would be buying stock, not selling advice.” This famous quote by Norman Augustine defines exactly what’s wrong with stock market experts. While investors are constantly looking for advice and forecasts to prevent failure in the markets, the so-called experts are only doing their job and getting paid for commission. Fundamentally, your brokers’ job is only taking orders and executing your trades. Their hidden objective is to get you to make as many trades as possible, so that they make money, based on trade commissions and fees. However, he is not someone you should turn to for stock trading advice or analysis. If he really was an expert and knew so much about the markets, he wouldn’t need to sit behind a desk and work so hard. He would follow his own advice and make lots of money!

1. There is no ‘Skin In The Game’

Next time your stock broker or relationship manager calls you to make a trade or suggest you the next big multibagger stock idea, don’t ask them what to buy or sell. Just ask them, what do they have or don’t have in their own portfolio ? This one question shall settle the case !

2. Brokers will always give more ‘Buy’ recommendations

Every time you buy and sell, your broker will get a commission as broking companies run on commission basis. Once you buy, you are likely to sell it later and thus, the brokers get two transactions minimum for their commission. Therefore, you will always see a ‘buy’ recommendation from your broker. In reality, exits are more important in the stock markets than your entry. The broker must be able to give you right selling advice as well, or else he is not doing his job right.

3. They are paid on a monthly basis, and thus recommend on a monthly basis as well

All relationship managers have an incentive on the basis of revenue they generate i.e. commissions or brokerage as it is referred in India. The more brokerage you generate, the more incentives you get. It is that simple. All broking firms give monthly targets to their branches, these targets are then distributed among relationship managers working at the branch level. Then there are incentive brackets, performer of the month awards & what not ! Do you really think a relationship manager will  put your interest first & give you sensible advice ?

4. There is a conflict of interest

Brokers must give unbiased advice to their clients. However, many broking firms have an investment banking relationship and advisory role with companies. They are often forced to recommend only these company’s stocks to their clients, creating a huge conflict of interest. Also each broking firm has a trading desk & research desk both. It so happens that the research desk is recommending a stock, and at the same time trading desk is selling it. Effectively dumping the stock among their retail clients. It may not be done with an intention, but it does happpen. Take this recent case for example. 

Some firms even have a retail desk & HNI desk as high networth individuals earn fat commissions for brokers. Herein HNI desk is given preference. They get different research & recommendations, and are given preference over retail. It so happens that an exit call or an entry call is given to HNI’s first to make sure they benefit the most.

5. The House View is the Right View

In major Indian broking houses, there is a list of good stocks that must be recommended by analysts to their clients. Even if one analyst believes that a stock is not going to perform well, he rarely makes a ‘sell’ recommendation and takes the risk.

6. The more the recommendations, the less you remember the bad ones

This is a master strategy employed by most brokers. When they give you around 30 recommendations over a period of 2-3 months, even if a few fail, one or two will perform well. They will shift your focus on these stocks, making it unlikely that you will remember the bad performing ones.

Things to remember to protect yourself from the agony of broker recommendations:

• Don’t go by the buy sell strategy of your broker. Read and analyse the company’s balance sheet that you want to invest in, and only go ahead if you are happy.
• Take responsibility for your investments. It is your money and thus, it must be entirely your decision about where you invest.
• Take every recommendation with a pinch of doubt. Check whether the broker has any conflict of interest or is genuinely making the recommendation
• Be rational and objective about your investment goals. Only choose recommendations that match your investment philosophy and goals
• Don’t buy all the stocks your broker recommends. He will approximately make 100 recommendations in a year.How can you create a portfolio with 100 stocks?
• Give yourself enough time to review and plan your investments. Educate yourself and never let your money be ruled by anyone other than you.

A famous Warren Buffett quote states, “Predicting rain doesn’t count. Building arks does.” Brokers will give you lots of predictions and recommendations about the future. However, it is important as an investor that you make the right choices for a lucrative and rewarding future.

 Happy Investing

Source: AlphaInvesco