The investment industry is intricate and convoluted. This has convinced many investors that they need the services of a stockbroker to really make headway. Over the years, many investors have enjoyed a lot of comfort and peace of mind because they had a smooth relationship with their stockbroker. Others, on the other hand, now have woeful stories to tell about their broker because the relationship between them suffered from conflicting interests as well as lack of communication and understanding.
If you are going to entrust your hard-earned money to a stockbroker, you must bear in mind that there are certain truths that your stockbroker will not tell you. Here are 10 of such hidden truths that stockbrokers won’t tell you:
10 Hidden Truths about Investing That Stockbrokers Won’t Tell You
Table of Content
- 1. You can’t know all the fees you will pay
- 2. Stockbrokers’ recommendations are usually biased
- 3. Stockbrokers’ credentials doesn’t necessarily depict experience
- 4. Your stockbroker may not be as knowledgeable as you think
- 5. Stockbrokers cannot predict or beat the market
- 6. Buying mutual funds with loads is not recommended
- 7. You will always pay more for a stock than it’s worth, and sell it for less
- 8. The stock market is run by robots, not people
- 9. You can’t sue a stockbroker
- 10. If an offer sounds too good to be true, it’s a hoax
1. You can’t know all the fees you will pay
Your stockbroker might recommend you a wrap account, placing emphasis on the 1% or so annual brokerage fee. But with the advantage of owning a variety of mutual funds and other investments come the obligation of many hidden fees, such as expense ratios and transactions costs of the funds in the wrap account. These expenses can easily double at your cost, but your stockbroker will most likely not tell you this.
2. Stockbrokers’ recommendations are usually biased
Stockbrokers are into their business to make money—as much money as possible. And since they sell a range of products and investment opportunities, it’s only natural for them to recommend you the ones that will fetch them the highest commissions or profits. So, a stockbroker might not really have your interest at heart. Sometimes, they may try to force a “golden opportunity” down your throat, but it ends up being an opportunity for them, not for you.
3. Stockbrokers’ credentials doesn’t necessarily depict experience
So, your potential experience has bagged one of more of a CFP, CFA, CLU, or ChFC? That’s fine. But the certification only indicates their ability to pass an exam. It’s doesn’t necessarily mean they have the experience required to give your the results you expect. While those designations are meant to imply authority and experience, they are no longer worth falling for.
4. Your stockbroker may not be as knowledgeable as you think
First and foremost, the role of a stockbroker is that of a salesperson; their aim is to sell you a product. Many stockbrokers don’t know more about the investment market than the little they need to convince you into buying a product. Others fake their expertise by using lots of jargon that you don’t understand (and they don’t, either). There are no educations requirements for becoming a stockbroker, other passing a licensing or certification exam.
5. Stockbrokers cannot predict or beat the market
Whether your investment will do well in the future or not is completely beyond a stockbroker. There have been many recessions in the past and many will still occur in the future, but your broker did not foresee any past recession nor will they be able to predict where the market will head in the future. So, even if a stockbroker tries to impress you with graphs and bar charts, remember that no stockbroker can be smarter than the market.
6. Buying mutual funds with loads is not recommended
Your stockbroker will most likely sell you a mutual fund with either a back-end load or a front-end load. A back-end load involves paying a fee when selling before a certain time period, but a front-end load requires the payment of an upfront commission. Though mutual funds with loads are not recommended because of the additional costs, stockbroker will try to convince you into buying them because they get a continuous stream of income through the commissions you pay.
7. You will always pay more for a stock than it’s worth, and sell it for less
This is due to what is called the “bid-ask spread.” The reason for this discrepancy is that buyers pay the ask price while sellers receive the bid price.
8. The stock market is run by robots, not people
The vast majority of trades made every day are not done by big asset management firms, but by floor traders and computerized algorithmic models looking to take advantage of short-term price changes. So, humans are really not in control of the stock market, and this is why many predictions do fail.
9. You can’t sue a stockbroker
Most brokerage firms—those firms that hire stockbrokers—are members of a regulatory agency (such as the Financial Industry Regulatory Authority in the U.S.). By opening a brokerage, you cede your rights to sue the firm or the stockbroker, agreeing that all disputes will be settled through an arbitration process set up by the regulatory agency.
10. If an offer sounds too good to be true, it’s a hoax
Some stockbrokers can go to any extent while trying to convince you to buy a product. They usually sugarcoat their offers to make them irresistible. The rule here is: if your bullshit detector comes up with a warning sign, just walk away.