You may be thinking that choosing the right stockbroker involves a simple process of picking one that sounds like it can help you make enough money to buy your own island. While this might seem like a good shortcut, choosing the wrong stockbroker could leave you broke and disappointed.
Before working with a stockbroker, there are some essential things you need to know about them and yourself so that the partnership is beneficial for both parties.
The following article aims to outline some tips and advice on how to achieve this:
It’s about what goes on behind closed doors.
When most people think of ‘stockbrokers’, they probably picture young guys wearing expensive suits talking loudly into iPhones while opening champagne bottles with their teeth. Some people assume that these guys are making so much money they couldn’t possibly ever consider stealing from their clients. Unfortunately, this judgement does not always prove to be correct.
According to moneysmart.gov.au, ‘the main types of scams perpetrated by stockbrokers are “churning” (speculating on the buying and selling of the same investment product), market rigging (manipulating the price of an investment) or front running (storing orders directly before them for execution in return for a fee).’
What you don’t often see is what happens between those moments where you’re admiring their fancy dinner parties and glitzy lifestyles; behind closed doors, stockbrokers could be looking at your account information, talking to their friends and family about your investments or even making secret deals which may not be in your best interests.
There is only one way to ensure that you are placing your trust and hard-earned dollars into trustworthy hands: doing a thorough background check on the person you’re entrusting with such an important job. It’s worth considering every angle before you make the decision.
It’s good business for them, not always for you.
Some stockbrokers out there believe more in making money from commissions than actually trying to help their clients achieve financial freedom. Some brokers earn around 70% of their income from commissions related to transactions done for clients! If they’re going to go through the hassle of investing money on your behalf, they’re probably not going to be in it for the long run if there are much higher returns waiting for them elsewhere.
Why is this a problem? Well, imagine you have $10,000 with your stockbroker who had recommended some investments that turn out to be worth only half of what you paid for them when they went wrong. As your account tanked, your stockbroker would have earned $3500 just by making the initial transaction!
Likely, they don’t even know any better themselves. Most brokers go into the trade because they don’t understand how more complicated investment strategies work or because their family pressured them into doing so since it’s considered one of the safer jobs around. They usually get sent on introductory courses to familiarise themselves with the basic concepts of trading, but that’s not nearly enough to equip them for being your financial advisor.
When you’re dealing with someone whipping out a stock trade in their sleep, it pays to have either an actual expert at your disposal or someone who has taken the time and effort to become well educated about what they are doing. Be aware that it’s possible that your broker doesn’t even know any better; somebody needs to look out for them too!
Knowing the ins and outs of these things does take quite some time, often years, so if you’re currently working with a broker who didn’t study finance, don’t be surprised when they start doing things like making transactions without your permission or taking weeks to reply to your messages.
Be careful who you trust with your money!
It’s always better to be safe than sorry, and this is a case where the adage rings true. If you’re committed to finding someone who will look after your interests as if they were their own, then do yourself a favour and avoid those stockbrokers whose only priority seems like making as much money as possible, no matter what it takes.
Instead, find the guys who are willing to go above and beyond for their clients, even if that means earning less commission or losing out on opportunities that might have led them down another path altogether. Saxo Australia is an excellent example of the right stockbroker.
When somebody cares about what happens to you, they’ll be far more likely to give you sound advice.