Wednesday, January 11, 2012

4 Facts your Broker or Adviser won't tell you

You and your broker (or financial consultant or insurance agent) have different interests. They have to sell things to make a living. The more they sell, and the more expensive the products, the better off they'll be. Irrespective of what they claim, like any other salesperson - for shoes, cameras, advertising or high-tech medical devices - moving products is their job. Your job, as a customer, is to look skeptically at those products, ask yourself if you need them, compare them with other options and consider the cost.

Here are 4 facts your broker/adviser will not tell you but you really need to know:

Fact #  1: The broker/adviser was hired for their people skills and charm, not their investing skills:

The pretty adviser or the smooth talking broker is there exactly for their looks or their persuasion skills. "You are more likely to become a relationship manager, if you were successful selling used cars than if you have a financial-analysis degree." says Jithin, a recruitment consultant at a leading global HR consultancy firm. Brokers have to be polished and have good persuasion skills. They also have to be thick-skinned, aggressive, capable of dealing with rejection and good at coercion. Knowledge about financial products comes much lower on the list of traits hiring managers look for in brokers.

As you might suspect, brokers selling financial products they don't know much about can lead to huge disasters.

How to protect yourself: Be sure you read all the paperwork and fully understand anything you are investing in. If it seems too complicated, stay away

Fact #  2: The broker/adviser may need to put their interests above yours to make money:

Unlike investment advisers who run managed investment accounts or mutual funds, brokers aren't obliged to put your interests above theirs. That could cost you money. For example, brokers typically have a "preferred" mutual fund list. That just means the fund family paid a bribe to be on that list. Likewise, if a broker works for a company with a mutual fund arm, he's likely to push those funds before others.Those might be good funds, mind you. It's just that the broker has no incentive to tell you about other funds that might be better or cheaper.

How to protect yourself: Before agreeing to an investment, ask how much your broker is making on the deal, and how. 

Fact #  3: This stuff they call 'In-House Research' is really advertising:

Many brokerage firms are still attached to investment banks that collect huge fees for bringing companies public or raising capital, despite all the scandals this caused during the tech bubble. Back then, this conflict had analysts such as Henry Blodget, who worked for Merrill Lynch, praising a company in public reports while calling it "junk" in private e-mail. 

How to protect yourself: While a lot of brokerage research is good -- especially big-picture stuff on sectors and trends -- be skeptical.

Fact # 4: Once you sign on, they may not take your calls:

One common complaint about brokers is that they are hard to get on the phone once you've signed an agreement.They don't return your call or respond to emails on time, especially if their advice goes sour.

How to protect yourself: Before you sign on, discuss the level of communication you expect and what the broker can offer

All of this, by the way, isn't to say there aren't investment advisers out there who really can help you.But be careful, ask tough questions, and keep your eyes open. The market can be a great place to make money, but as we've learned, the system isn't necessarily geared to making money for you and me by default.

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