Shopping for a Broker

Shopping for a Broker

I have gone over in great detail all the aspects of bond investing, so now it's time to talk about opening a brokerage account. This will also be relevant for those of you who already have a broker but may be shopping for a new one.

If you have an investment advisor already and are thinking about getting another one, don't feel bad about it. You may feel some kind of loyalty towards your current advisor which is fine. Just keep in mind, most people have more than one brokerage account, therefore they have more than one advisor; usually.

So what is better? Should one have one advisor, two, three, or more? And, why should I have more than one advisor in the first place? It is never a bad idea to get a second opinion. When it comes to doctors, it is done all the time, and means no disrespect to anyone. It is possible to have too many though.

You have probably heard the saying too many cooks spoil the broth; well, too many advisors can spoil the advice. On any topic, you will find five people for and five people against, and everyone of them will have compelling arguments. The guy from Wells Fargo will tell you, not it's not time to get back into the market and here is why. You are convinced until your Merill Lynch guy gives you ten reasons to jump back into the market. Then you turn on CNBC and David Faber is telling your to average in. So who is right? That's the sixty-four thousand dollar question that everybody wants to know the answer to. If you pole ten professionals you will probably get eight differing opinions, so you have to hold your own counsel as well.

There is so much information on the Internet nowadays it is often difficult finding what information is relevant to you and what isn't. The better your advisor knows you the more accurate his advice will be. Then if the both of you put your heads together you should be able to make your dollars count.

Some people will have an on line account where trades are next to nothing but they do not receive advice so they often go to their Merill guy to get advice form. Having received the advice they go to their discount account to place the trade. So what's the harm in that you may ask? Your Merill guy, the one who gave you that great stock pick would like to be rewarded for it, by your doing business with him. I can guarantee you if you keep doing that your Merill guy will figure it out and may fire you.

What do you mean fire me? By firing you he is sending you your stock certificates to you via snail mail and he is ending the relationship. Now here is the kicker. It will probably take a good ten days to two weeks before you receive your certs and can deposit them in your other account. What happens if your Oracle stock shoots up and you want to sell your holdings before it heads down again? Nothing happens. You cannot do it while your certs are in transit. This could be disastrous. I have fired people before for various offenses and it is never a good thing. If your Merill guy makes money for you do the trades with him. No one wants to work for free; not you, and not him either.

A lot of brokerages will advertise the fact that you will have your own broker, even if you have a very small account, and that's true. Lets examine that. I know from experience that it takes more time and effort to advise a newbie, or the guy with a small account than it does to advise the guy that has ten million with you.

So how does that work? A seasoned professional generally knows the basics at least, and does not need to be counseled at every turn. The call will be quick, to the point, and there will be no misunderstandings. Now just try to place that same trade with the guy who has fifty thousand in his account. He will be confused about the bid and the ask. He will not understand why his limit order did not go off when the stock his his limit price. He will be confused about trade date versus settlement date and will inevitably go beyond his accounts buying power. He may even get confused about the order you just put in. I may sound a bit cynical here, but I have seen it all and there is a reason why brokers all want to get to the point in their business that they only deal with those with high net worth. When I got out, I would only take on clients who had a million in the market or more.

Realistically you are not likely to get a very dedicated broker who is thinking about your account when you have little invested with him and his firm.Now the guy with the ten million with his broker, you can bet his advisor is calling him nearly every day with news, updates, and investment ideas.

What about transactional business versus fee based accounts? People usually shy away from fee based accounts in times of market turmoil. Who wants to pay their broker one percent to watch it lose value everyday? When your Morgan Stanley guy calls you about a particular stock, who's interest is he thinking of: Yours or his? Does he want you to buy because he has yet to pay his mortgage this month, or is it because it really is a good idea for you and your accounts? The truth is, you will never know what the truth is.

However, if you have a fee based account, you know that when your advisor tells you to buy something it is in YOUR best interest. If your account loses money due to his bad advice he also feels it in the pocket book. If he does a good job he is rewarded with more money because the one percent you pay is now based on five hundred thousand rather than four hundred thousand. Keep in mind most brokerages have a much smaller fee if you are sitting in cash.

Stay tuned for the next installment in shopping for a broker.

Happy Reading