In March 2000, every stockbroker in the world was telling you to allocate 90% of your portfolio to NASDAQ bubble trash stocks like CMGI and INSP. If you listened to these experts then you got slaughtered. What did you think would happen? When you trust those who have a financial stake in your decision, you will always lose.
The most obvious type of broker rip-off that occurs is encouraging active trading to run up commissions. One week you’ll get a call from Mr. Broker advising you to buy into the latest hot tech stock, and if you fall for it two weeks later you’ll get a call advising you to sell. Whether you gained or lost money on the transaction is irrelevant to the broker because he gets his commission regardless.
Now let’s talk about a scam more sinister: recommending stocks to you that the brokerage recommended to their best clients weeks ago. The broker tips off his big money clients in advance that they are going to hype some new stock in the near future. The fat cats all buy in and the brokerage even buys a big stake. A few weeks later some bozo analyst goes on CNBC and says “XYZ stock is ready to breakout” and you get a call advising you to buy.
The above two classic scams are typical of the industry. If you weren’t aware of them then you probably have no business investing in securities. You must remember at all times that when your money is involved you cannot trust anyone, especially your stockbroker.
Stock Brokers Are Worthless
I’m going to make a wild claim here and state that stock brokers are completely worthless to your bottom line in ninety nine cases out of one hundred. What are you paying a broker to do? If you think it’s to recommend investments to you then think again. Suppose a broker truly has discovered a great bargain in the stock market. Further suppose that instead of tipping off his million dollar clients, the broker called you first to give you this great info. Now imagine a naked supermodel knocking at your door in the middle of the night asking for shelter. It’s time to stop dreaming and get with reality.
The only legitimate reason to pay a broker is to get superior order filling. Many online brokers suck in the department, especially on NYSE issues. If you make large limit orders then the expensive broker will probably pay for itself. Otherwise you’re flushing your dollars down the drain and setting yourself up to take a fall in yet another broker scam.