Switching brokers unwisely when your broker retires can lead to lining your new broker’s pocket
It should come as no surprise that you can find bad stockbrokers as well as good ones.
Unlike other livelihoods, the brokerage industry provides financial incentives that can make it highly profitable to abuse client trust. These incentives are so insidious and powerful that they can warp the decisions of brokers who honestly want to do the right thing for their clients.
After all, the financial industry deals in intangibles, so bad advice can take a lot longer to spot than, say, a bad haircut.
Your retirement plan
Benefit from our experience. We’ve helped many Wealth Management clients develop retirement plans that meet their goals and sooth their concerns. Read our clear, simple guidelines. They’re all in one comprehensive guide—”12 Steps to the Retirement You Want.”
You always need to be on guard. That’s especially so if you find yourself switching brokers involuntarily.
When a broker retires, he can sell his clientele (or “book of business”, as it’s called) to another broker. The sale price of a “book” is based on assets in client accounts, and on commissions and fees those clients generated in the past few years. Both figures have been rising in recent years.
A truly ethical broker would be extremely choosy about who he sells to. On the other hand, the final sale price usually includes a percentage of commissions and fees the book generates for several years after the sale. If a retiring broker sells his book to a more aggressive buying broker, he may wind up receiving a higher total sales price.
By the time a broker puts his book up for sale, he may be more concerned with his own retirement than yours.
The buyer is often a younger broker who has to borrow the down payment, then follows it up with a series of payments. That usually means the new broker needs to wring a larger flow of commissions and fees out of the clients than the retiring broker ever did, just to service his debt.
This came to mind recently when a friend told me about his experience with switching brokers. It started out like a lot of financial horror stories that I’ve heard over the years.
He had a high opinion of his old broker. His new broker seemed even more knowledgeable and sophisticated than the old one. But my friend often found himself going along with recommendations from the new broker that seem aimed largely at generating commissions. That was a particularly bad sign that early in the relationship, when presumably a new broker would be on his best behavior.
When a broker starts out making recommendations that serve his interests better than yours, things can only get worse. After all, he can earn ever-higher commissions and fees by advising you to take steps that are even further out of tune with your long-term needs. You may not find out just how bad switching brokers was until the next inevitable market downturn.
Investing tip: Use our three-part strategy
No matter how you invest for retirement, you should take care to spread your money out across the five main economic sectors: Finance, Utilities, Consumer, Resources & Commodities, and Manufacturing & Industry.
By diversifying across most if not all of the five sectors, you avoid overloading yourself with stocks that are about to slump simply because of industry conditions or investor fashion.
You also increase your chances of stumbling upon a market superstar—a stock that does two to three or more times better than the market average.
Our three-part Successful Investor strategy:
Invest mainly in well-established companies;
Spread your money out across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; Consumer; Finance; and Utilities);
Downplay or avoid stocks in the broker/media limelight.
Have you found yourself involuntary switching brokers in the last few months? Has your new broker’s advice been sound? Share your experience with us in the comments.
Comments
Wayne
It happened to me 15 years ago. My broker retired and I was informed that I was assigned a new Broker. He phoned me up one day and advised me to buy two new stocks that just came on the market, They would double themselves at least in a few days. They actually did but he did not phone me back advising me to sell. One of them was soon delisted and the other I salvaged about 25% of my purchased price. That was the last business I ever did with a Broker. I changed all my investments into self direction. At the same time I started my subscription to the Successful Investor Newsletter and soon after I transfered all my investments to a Discount Broker and after 15 years I have been happy with my investments.
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It happened to me 15 years ago. My broker retired and I was informed that I was assigned a new Broker. He phoned me up one day and advised me to buy two new stocks that just came on the market, They would double themselves at least in a few days. They actually did but he did not phone me back advising me to sell. One of them was soon delisted and the other I salvaged about 25% of my purchased price. That was the last business I ever did with a Broker. I changed all my investments into self direction. At the same time I started my subscription to the Successful Investor Newsletter and soon after I transfered all my investments to a Discount Broker and after 15 years I have been happy with my investments.