Is your broker your friend or foe (or just a bookie like in movie clip above)? If you have had a one on one relationship with a stock or commodity broker, then we’re guessing you’ve had the unpleasant experience of losing money. You may think your broker would make a great neighbor, worthy of a Sunday barbecue invitation, or has the potential to become a good friend. However beware of pay-as-you-go friendships with your broker because they may fragment right before your eyes, leaving you friendless, and penniless.
When loyalty doesn’t count: Our deepest friendships are based, in part, on loyalty. But when the bottom line is a business decision or financial transaction, your loyalty can lead to clouded judgment and costly mistakes. It is uncanny how steadily brokers drain cash from the pockets of would be traders who do not understand basic truths about the industry. Hopefully the next few paragraphs will open your eyes.
Bait and Switch: We confess to being a little cynical about the credibility of brokers because so many of them engage in a well rehearsed game of bait and switch. They promise new clients profits beyond their wildest dreams, then switch to damage control when losses start eating away at the account. Once the client/broker relationship has soured, the broker keeps the game going, and the commission dollars flowing in, as long as possible before the client quits in disgust.
Who Is Your Broker?
There are many different types of brokers, but they all have one thing in common:
They are eager to drain your account. You may have already met one of the following four types of brokers: the pusher, the yes man, the true believer, and the rationalizer.
The pusher – is by far the most aggressive. The pusher is in your face, on your back urging you to take X trade right NOW. He will not take no for an answer. The pusher is not above belittling or even mildly insulting you if you do not do exactly as directed. The pusher is in control and when he says jump, you’re expected to ask, how high? The pusher gravitates towards nave or weak-willed individuals who are susceptible to a dominant personality. If that might be you, beware.
The yes man – has precious few of his own ideas. Instead, he prefers to rubber stamp everything by always saying what he thinks you want to hear. His strategy is to troll for your opinions. The moment he detects what you think about a stock, he immediately reinforces that opinion in the hopes of getting you to place a trade. He is the ultimate sympathizer, always commiserating, forever testing the wind. The yes man is usually a passive aggressive person on the lookout for confident, opinionated clientele who like having their egos stroked.
The true believer – is often an old timer who is beating a tired drum for the same tired market that had a big move years ago. Always a fundamentalist at heart, the true believer tends to lean on his one sided analysis like a crutch, seeking any tidbit or rumor he can find for reinforcement. It is his mission in life to find and recruit other true believers, clients for whom hope springs eternal.
The rationalizer – is an amazingly consistent loser who always has an excuse for why his recommendations go bad. The rationalizer can cheerfully explain away every wrong decision and misguided belief except for one: his pathetic track record, which is never discussed. Like the true believer, next time is the rationalizer’s eternal refrain.
Who?s the most dangerous? These styles are not set in concrete. You’ll meet some brokers who are obviously pushers while others may display a combination of styles. Of these four types, the true believer and the rationalizer are probably the most dangerous. If they have your business, they do the most damage by hanging you on hope for long periods of time while they leech the lifeblood from your account. They will eat away at your capital, your confidence and your desire to trade.
Is there a catch? The problem with the brokerage industry is not the calibre of individuals it attracts. Honest, intelligent, hardworking people are drawn to trading every day, and brokerage firms are a natural gateway into the financial world. Many successful CTA’s and fund managers got their start as stock or commodity brokers. But that is exactly the catch: those people who evolve into successful traders inevitably move on to bigger and better things over time. So it is no coincidence that the vast majority of experienced brokers cannot trade. If they could trade, they would not have stayed brokers. Another large portion leave the industry because they are fed up with the internal conflict and sense of moral compromise. They are tired of seeing clients lose money day in and day out without fail. So who does this leave to be your friendly broker? You know who.
Am I detecting a conflict of interest here? Yes. The brokerage industry has a gross conflict of interest built in to the payment structure. CTA’s and fund managers have interests in direct alignment with their clients, because they are paid as a percentage of trading profits. They only make money if the client makes money. In contrast, brokers have no such alignment. Brokers take their commission cut whether their advice is good, bad, or just plain useless. So it mustn’t come as a big surprise to you that, when it comes to measuring broker performance within the industry, the entire emphasis is on commission revenues generated — as in: he generated a million two in gross commish last year – he must be a great broker. What about the profitability of his clients? Who are you kidding? The broker collects whether you win or lose. The broker expects you to lose, sooner or later, partly due to his high costs. Therefore, it is his job to get you to trade as much as possible, regardless of your best interests, so he can get his commissions before you burn out.
Is there any broker with integrity? We hope so, but what percentage of recommendations would you guess are actually based on solid analysis and firm conviction, rather than simply baiting a hook to draw in commission dollars? Zero would be a cynical answer, but sadly close to the truth.
Is there anything I can do? Absolutely, but, again, you?ll wonder if all your work is paying off. Let’s say you found the rare broker who is competent, knowledgeable, has a passion for the markets, and actually has your best interests at heart. He is probably new to the business, five years or less, and will not be staying much longer. Even with all this going for the relationship, there is one final obstacle to be overcome: You. In order to make effective use of your broker’s skill to place your trades, you must have the emotional temperament and discipline to ride out your inevitable losing trades of your system. Your strong commitment to the process of taking each valid trade of your system and learning from it while without remaining diligent is crucial. In other words, to make good use of a broker, you have to be knowledgeable and skilled enough to not need him in the first place.
So are you saying I can do it myself: The final lesson is that if you are going to trade, you can never substitute someone else’s experience for your own, or expect someone else to make up for your shortcomings. You must play your own hand, and ultimately dictate your own success or failure. This in itself ultimately makes the broker irrelevant.
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