Your investment broker is your go-to person for buying and selling investments on the stock market. Typical brokers work for large brokerage firms and will sell and manage securities for investors. They may also offer other financial services, but their main priority is connecting investors to stocks, bonds and other investments on the market.
You may rely on your broker for your investments, but there are also some things you may not realize about your relationship. Because of how the brokerage system works, there are probably some things your broker isn’t telling you.
They make commission off your investment trades…and can use that to their advantage
Most people go into investment knowing that their broker is earning a commission for selling them a stock or bond. However, what you may not know is that your broker might cherry-pick the investments they recommend to you because they offer higher commissions…and this is legal.
Investment brokers are bound by law to offer you suitable investments for your needs (under what’s called the suitability standard), but what is “suitable” for you doesn’t necessarily mean it is what’s best. Because of this, your broker’s motivations may be outside of protecting your wallet, and you could end up with a bunch of investments that really aren’t the best for your financial goals.
The investments your broker suggests may fall in line with your investment portfolio, but the one with the higher commission may ultimately serve your broker more than it serves you.
They have a pre-set group of investments at the ready
If your broker is associated with a particular investment company or issuer, they may have a list of securities they are restricted to selling at any given time, including proprietary products from that company. This provides you with a very limited scope of all the potential investments available and may even place your money in something riskier or less lucrative for you.
Your broker may even have a sales quota from that company. This can incentivize them to urge you toward certain opportunities over others so they can meet their quota and potentially earn a bonus.
It’s also important to think about how you can diversify your portfolio with investments outside of what your broker can sell you, such as real estate. Your broker is unlikely to spend time discussing these things with you, since they won’t earn off them, but that doesn’t mean they aren’t important.
They are constantly making money, even if your investments go south
Your decision to buy or sell stocks, bonds and other securities will typically earn your broker a commission fee for every trade. But if those securities don’t perform well for you, your broker isn’t out anything because their end of the deal is done.
Some brokers will urge you to trade investments more often than you’d like to (for instance, if you’re following a long-term holding strategy) so they can make more money off commissions.
Understanding your relationship with your broker & working with someone with your best interests in mind
Not all brokers will utilize the system to their advantage and urge you down an investment path that may not be right for you. Many brokers act with their client’s best interests in mind, even though they are not legally obligated to. But if you suspect your broker is taking advantage of you, it might be time to find a new one.
In addition to consulting your broker, it’s a good idea to meet with a Certified Financial Planner in Los Angeles that can provide advice and not products. Look for a firm held to the fiduciary standard—meaning they are legally obligated to put your best interests in front of their own. You advisor can help you take a broader look at your investments and how they fit into your greater financial goals and outlook.
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