March 23, 2009, 6:00 am

How to start investing – A DIY Growth Investment Strategy Part 5 – What Does The Broker Do? (Besides taking your money away with fees!)

by: The Financial Blogger    Category: Financial Planning,Investment, Market and Risk
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I must say that brokers don’t have the best reputation these days 😉 They are blamed by their clients for letting them into the market while it was crashing. They are also blamed that they didn’t see the crisis coming and that they should have started getting out the market before things go sours. Before we continue on which kind of “financial super powers” brokers may have, let me tell you that Warren Buffet lost more than 30% of his worth during 2008… So if the most prolific investor of the stock market history couldn’t see things coming and get good returns out of it… who will?

This is the time to go back to my previous post about questions on your investor style and look at your answers.

The very first question (how much you have to invest right now) will not determine if you need a broker or not, but it will surely determine if the broker will want to work with you. Brokers are paid on commission only. Therefore, most of them will not take client with less than 50K or 100K of liquid assets. However, there are a few of them who prefer to build a strong book of young professional, so they might take you anyway if you have a high income potential job (the classic professionals….).

If you want to get involve in the process of buying stocks, mutual funds and other investments, a broker may be interesting for you. Brokers are usually closed to their clients and offer a great support. They will tell you about the economy, what is going on in the stock markets and consider your takes (i.e. will advise you of any potential trades to be made and you make the call).

They have the right (and they should do it in order to do their job correctly) to recommend buying or selling any financial products. This is why you may get a more active management of your portfolio.

They can open a fee based account (a percentage of your asset under management is charged no matter if there are trades or not) or a transaction fee based account (you pay a transaction fee each time they do a transaction). Most of the industry is going toward fee based account to avoid conflict of interest (many brokers had the tendency of doing way too many trades only to generate more commissions).

There are as many styles of brokers that there are brokers in the industry. Each individual has his own perception of the market and offer different investing strategies.

A great point about brokers is that they have access to everything on the market. Therefore, they will not be biased by offering one fund compared to another. They can also build a portfolio with bonds, stocks, etf’s and mutual funds at the same time. Their flexibility is one of their great advantages. However, the problem is that some brokers may learn a few funds, stocks and plug them in for each client. After all, this is one thing to have access to the whole financial market; it is another to master a million products at the same time!

In the end, you should look for a broker if:

– You want to get involved in the transactions.

– You want someone giving you his opinion on the market or on a specific stock, bond, mutual fund.

– You have more than 50K to invest ;-).

– You want to keep the same person for several years (most of them are in the business as a life career… if they make money 😉 ).

– You want to get “tips” and “hints” (beware, there only opinions, not the truth coming from God!).

– You are looking for someone to watch the market for you and give you a call when something happens.

– You can trust someone else doing trades for you with your money.

– You want to know what is going on in your portfolio and why you are holding what you have in your account!

In the end, dealing with a broker is in the middle of being a DIY investor and dealing with a financial planner/advisor. The thing is that you still need a financial planner/advisor for other aspect of financial planning as Brokers will mostly take care of your investment only (unless you find a broker that is a financial planner at the same time 😉 ).



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Comments

Buffett is so large an investor now he is the equivalent of a pension fund, and similarly does not have the opportunity to be quick on his feet, and therefore not a good example for your point. In September, my Advisor suggested I stay out of the equities market, and leave my money in fixed income. Where were the other Advisors of small-scale investors?

Many who are claiming to be Brokers fallinto the category you describe — they are really only salesmen, as they do not research broadly enough to offer a wide range of options to an investor. Thus–choose carefully and do your homework.

DAvid

by: The Financial Blogger | March 23rd, 2009 (8:25 pm)

DAvid,
Jarislowski, our Canadian Buffet, called the shot that the market will go down in 2006, 2007 and still offered poor performance in 2008. He was wrong 2 years in a row and couldn’t do anything.

It’s great that your advisor was right this time, but if 7 portfolio managers out of 10 can’t beat market on a steady basis, what are the chances a broker can? And if he does over several years, he will surely become as big as a pension plan as any other star stock trader 😉

Even if you do all the research in the world, there are still imponderables. Let us know when your advisor think we hit the bottom and when we should put money back in the market, we should track his record 😉

Cheers,

TFB.