Seven Things Your Broker Doesn't Want You Know

Have you entrusted your nest egg with a stock broker? There are many things your broker would rather you just didn't know. We can come up with seven. Maybe there's more but we can't spend all day on this...

1) The expenses of the mutual funds I'm recommending to you are really, really high. What they tell you is "You don't have to pay me. Let the industry pay me," which is to say, he gets a commission for selling you a mutual fund. That works fine in real estate so why not for your investments? Well, here's why not: The mutual fund recuperates the commission they pay the broker by charging you a fee. Some charge fees up front (front load), some when you sell the fund (back load), and many charge a fee every year. But all your broker will point out is that you aren't paying him anything.

2) Your portfolio has more risk in it than you think. Many broker clients assume their broker is creating a portfolio that fits with their individual risk tolerance, and maximizes expected return based on that risk level. But that isn't typically the case. A stock broker's principle business is selling you products and collecting commissions. Furthermore, the broker's duty is to his employer, not you. Because commissioned products charge high fees, they need to take more risk to compensate for those higher fees to net you the same return you would have in a fund with lower fees.

3) I didn't pick your stocks... someone else did. Typically, a broker buys stocks, bonds and funds from a list provided to all brokers at the company. Those are often the products that company management stands to make the most profit by selling, and they change from week to week or from day to day. So what you end up with is a hodge-podge of items that don't follow a logical investment plan.

4) I get a trip to Tahiti because of all the stuff I sold you! The industry is coming down harder on this one than just a few years ago. But the reality remains that brokers compete with each other and are given sales rewards, perks and benefits from management upstairs.

5) Your 22% return was 6% below market. Now maybe you think a 22% return is fine, and anyone who is unhappy at not getting 28% is just being greedy. Well, maybe so if you could get that 22% return every year. But you can't. You will also have 5% return years, and flat years, and years with small and large losses. Your investment goal should be to capture a high average annual return over many years. That's why it's vital that you capture all of the returns in the good years, to offset mediocre and down years.

6) The interests of my employer come first. Brokers do not have to act as fiduciaries, which means they don't have to put your best interests ahead of their own. They only need to sell you investments that are "suitable." That says nothing about costs. They take your life savings and invest it according to someone else's interest? Does that seem crazy? They do, and it is.

7) Your account is not diversified. Your broker will point to the 57 stocks he bought for you, or the 20 different mutual funds and tell you that you're diversified. From what I've seen most brokerage accounts are not well diversified.

That's because almost all of the stocks your broker will buy for you are U.S large cap stocks. And most of the funds they buy, the ones that pay those commissions, have managers who chase returns by overbuying U.S. large cap stocks. You may have 20 mutual funds, and 15 of them may own Apple. Is that diversification? Of course not. A portfolio filled with different stocks that tend to move together isn't diversified, no matter how many stocks are in there.

A truly diversified portfolio is built on various asset classes that have as little correlation to each other as possible. That way, when one goes south it doesn't necessarily mean they all go south. That's diversification.

The solution is simple. Seek out a competent fee-only financial advisor who has no affiliation with any broker dealer. A financial advisor will charge you a fee based on assets managed, and will then create a portfolio specifically designed to help you reach your lifelong financial objectives. They receive no compensation for selling particular investments, and are therefore unlikely to fill your portfolio with high cost or overly risky products. They also have a legal fiduciary obligation to put your best interest ahead of their own.

Source: ezinearticles.com

Outlook on Interest Rates

Withdrawal of stimulus must be prudent, China and U.S. say. The U.S. and China agreed that the global economic recovery is "not yet solid" and that the nations must continue to stimulate their economies, said a senior official participating in the U.S.-China Strategic and Economic Dialogue. "Given the uncertainty embedded in the European sovereign debt crisis, the two countries agreed that the pace of retreat from stimulus should proceed in a steady manner," said Zhang Xiaoqiang, vice chairman of National Development and Reform Commission. China Daily (Beijing) (25 May.)

Source Site

Quote

"In a capitalist society, all human relationships are voluntary. Men are free to cooperate or not, to deal with one another or not, as their own individual judgements, convictions and interests dictate."
- Ayn Rand

Interesting Question

With six consecutive intraday triple digit swings from high to low in the DJIA index, where is the safest bet during these uncertain times?

Beginning last Thursday, volatility has returned to US markets with a vengeance. So who's going to win the battle between the bulls and bears now? With the loss in confidence in global markets and the further exposure of the rigging games of markets precipitated by the 700 point drop in the DJIA in ten minutes last Thursday, sustained volatility and further corrections are likely in our near future. If so, then where's the safest place to be now? (Source: SmartKnolwedgeU, LLC)

This is a "Sales Tactic". It's being used to promote FEAR.

One should not listen to this NOISE. The portfolio should be managed based on the intended use of the money (duration management). It is impossible to continuously guess the direction of the markets and the economy. Historically, economist have correctly predicted the direction of the economy +/-30% of the time, therefore they were wrong +/-70% of the time. Why would anyone individually or with professional help then search for the "best investment in uncertain times"? By the time it's identified it's too late.

Solution - Strategic Portfolio Management based on your specific risk/return profile. Think of it as the roller coast ride you are willing take with your portfolio, before panic sets in. It's not easy to Identify and it is dynamic. Behavioral Finance studies have shown that it is a moving target (feeling) based on what most recently happened to you. So you must use logic (easier said than done) and education to manage the panic/emotion reaction. A prudent portfolio starts with a focus on the following:

1) Capturing Market Returns, not chasing the "hot dot"
2) Diversification
3) Asset Allocation
4) Reducing Cost
5) Rebalancing to target

It's focusing on the things you have control over.

This is not an active vs. passive argument. In the long run, I think both with get you where you need to be, i.e. it's a push. One just reduce the knee jerk reactions - I'll let you decide which.

Outlook for the U.S Housing Market

Dean Baker doesn't see a sustainable housing recovery. The U.S Government's subsidize are coming to an end. Interest rates are expected to rise.

Are the Feds Trying to Nationalize Your Retirement Savings?

The following link addresses the issue.

powerlineblog

Fed Worried About Housing Bubble In 2004, Transcripts Show

Some members of the Federal Open Market Committee were starting to worry as early as March 2004 that the housing market was overheating, transcripts show. "A number of folks are expressing growing concern about potential overbuilding and worrisome speculation in the real estate markets, especially in Florida," said Jack Guynn, then-president of the Federal Reserve Bank of Atlanta, according to the transcripts. The New York Times (free registration) (03 May.)

Source: NY Times Link