Issue time
12:39 pm , by
CTreit
Category:
Financial Goals
Retail brokers skip financial planning
May 18th, 2010It feels like I’ve “been around the block a few times” during my career in finance: stock trading, arbitrage, financial planning, etc. But I always avoided the block where retail brokers hang out. These guys frighten me. They even get me angry because I find they give financial professionals a really bad reputation – as if Wall Street needed an even worse reputation!
No, I am not talking about the retail brokers who have become “wealth managers.” Those guys are different. I am talking about the good old-fashioned retail brokers you may know from the movie “Boiler Room.” I though that they died out a while ago when new regulations supposedly put an end to their methods of peddling stocks. But no, they are alive and kicking. They have adapted to our new times, and work just as scarily, but in a different legal environment – it seems the laws are the only thing that’s changed.
This is how retail broking works. A manager tells his guys – yes, they are all guys, no women – that they are not stock pickers, that they are sales people. (This is a quote I overheard a little while ago, “Sales, is what we do best and this is what we focus on.”) Then the guys go to their desks and make one call after another. Cold calls. To you and me.
Many of these old-fashioned retail brokers still do the old-fashioned business that others call “churn and burn.” You get a new customer. You have him or her trade actively, and they also end up paying you commissions for all those trades. That’s the “churn” part. The customer usually ends up losing money at some point – but the sales guy doesn’t. After all, he “sold” you all those trades. And remember, the retail broker is a sales man not a stock picker! This is the “burn” part. They don’t have to be any good at choosing stocks – only good at making you buy them! After being burned, the customer closes the account and the retail broker goes on looking for the next victim – I mean customer – to start the entire cycle again. You can guess that very few such customers actually win in this game.
Yet, these retail brokers fulfill a need – not a glorious need, but a need nevertheless. They provide their victims with the thrill of legitimatized gambling. It doesn’t take place in a darkened casino, or the basement of some guy’s home. It’s all right out in the open. But as the customer agrees to these trades, note, there is no financial planning, no asset allocation, and no portfolio design behind any of it. Maybe they think that most of these customers probably can spare a few thousand bucks since the call lists generally consists of people who have made one or two shekels in their lives. So, they likely think, “There is really no big harm done anyway, right?” Or is there?
Interesting viewpoint. Never thought about stock picking as fulfilling a need. Maybe some people want to feel like they’re in control of their finances, so they buy and sell actively.
But at the same time, they’re not skilled enough to pick for themselves, so they have a broker do it for them?
I guess if the person is agreeing to the trades, then they should accept responsibility for performance. But I wonder if they really know how all the costs are affecting their returns.