Risk vs Reward

RISKS VERSUS REWARDS

Career day continued

I have dedicated a whole separate article on the subject of risk versus reward here as it is such an important issue when discussing the career of a stockbroker, and something you cannot get away from as you do business from day to day.

As a stockbroker I soon realized that the fear of the A word (arbitration) is something that just is not going to go away. As a financial advisor (stockbroker) you have worked hard to establish yourself in a lucrative and exciting career and you know all too well that one misguided person can bring it all crashing down about you in seconds. That is the big stress of having a job in the stock market.

I was one of the lucky ones and never was taken to arbitration, despite the crash of the markets in March of 2000. At times when the market is down people begin looking for someone else to shoulder the blame for their financial problems, even if they did all the stock picking. They often see arbitration as a normal way to recoup their losses and in many cases may not even be aware what arbitration does to ones public permanent record and career.

According to public record on all stockbrokers, it is recorded if you were taken to arbitration, but the outcome is not recorded. What this means is if you did no wrong, even fell victim to a person wanting to take advantage of you, you are lumped in with all the bad apples in the industry. A person looking at your record only knows you were dragged through arbitration and that alone will make them look towards someone else. That is the best scenario.

The world is full of people trying to take advantage of others. All an unscrupulous person needs to do is find a broker who has been to arbitration, and then they have the perfect victim. It is common knowledge that once you have been to arbitration it is hard to win the next time as the panel is predisposed to siding with the investor and not the broker. The investor need not lose any money to take their broker to arbitration. The act of getting there goes a long ways in opening up the coffers of the arbitration panel. It is a quick easy scam that is alive and well, and that is the big stressor of a career as a financial advisor.

Trading errors are another thorn in the side of the stockbroker, and one that has sunk many a ship before it has even sailed. Fortunately what I am talking about has been corrected.

If ever you make a mistake entering an order for a client is has to be corrected. If the firm takes a loss, the loss is passed on to the broker to pay for. If the error results in a gain for the company, you do not get to share in the gain. Sounds like a raw deal doesn’t it? Here is how it works, and I will use myself and an error I did to illustrate this point.

Some years ago when I switched to another firm I was entering in an order for 100,000 shares of Cisco Systems when I made the dreaded mistake. I meant to make the order a limit order on a sell; however there is an issue with the software that sometimes causes the system to turn your limit order into a market order. This happened and the sell of the Cisco went off at the market. When I realized it the next day the firm had to buy it back for the client’s account who then was able to sell it at the price he wanted to in the first place.

The bad news for me is that my company lost fifty six thousand dollars on the deal and I was required to pay that amount, in its entirety. If I could not, then I would be terminated immediately. I paid the 56k. Now, had the market moved in favor of my company and they would have made money on the deal the broker would not have seen a penny. About five years after I had left the company they were sued for that practice and companies can no longer make their brokers accountable like that. Too late for me though.

The last issue you have to deal with can be a real kicker as well. Everyone likes to be the bearer of good news, and your stockbroker is no difference. On the flip side of that, nobody likes to be the messenger that gets shot for delivering the bad news. As a stockbroker you will make mistakes, you will give bad advice, and your client will lose money because of you. YOU WILL CALL THEM AND GIVE THEM THE BAD NEWS.

I once made two aggressive picks for a clients retirement account and in two days the man had lost over 100,000.00. Needless to say, that was a phone call I would have paid to shuffle it off on someone else. I made the call. After the initial string of four letter words, my client calmed down and actually asked me what we should buy to make back the money lost. To his credit, not one time did he even mention arbitration? Bottom line, we made up the lost amount and added a half million more to his account. He turned out to be one of my best clients.

There you have it folks, the real risk of being a financial advisor. If you feel you can live with that, the worst case scenarios, then you’ve got yourself a career.

In the mean time, good luck and happy investing.