One Question To Ask Your Broker

By Al Thomas

I don’t know how most people choose a broker, but it seems they do it very badly.

How can I come to that conclusion when I know so few of them?

They let him lose their money.

If anyone is going to have a say how a person’s money is to be invested it should be a very serious and time consuming decision. It can’t or at least shouldn’t be because he is a relative or a friend of a friend or you answered some freebie advertisement.

The trouble is people don’t know how to do what the industry calls “due diligence”. This is what brokerage house tells you to do before stock is purchased in a company. Look at the balance sheet, study their income history, find out about the management, and see how the sector in general has been doing historically and many other nuances of finance.

As a technical analyst I don’t pay attention to that sort of nonsense. All I want to know if the stock is going up. That’s all.

There are more than a quarter of a million stock brokers in the U.S. When I owned a brokerage company I hired about 300 brokers. My conclusion is about 1%, yes one percent, of the stock brokers know what they are doing. They all have a smooth patter about the market, but few know how to protect customers money..

The true measure of the broker is does he make money consistently for his clients. Most important of all does he protect his client’s money when the market is going down. It is my opinion that no customer should ever lose more than 10 or 15% in any bear market. Did your broker suggest a stop loss order?

It is outrageous that Wall Street allows its customers to see their account drop by 30, 40, 50% and more. For years the Buy and Hold Theory has been shown to lose money. An investment account funded in 1999 now has less money after 10 years.

Stop loss orders are discouraged by all brokerage houses. The broker is to keep the customers money fully invested at all times even when the market is very obviously going down. Brokers even lose money in their own accounts. They have not been taught how to protect their assets. Money market accounts do not make money for brokerage companies so the customer is told the old saw “the market always comes back” – except when it doesn’t. Think about this – a 50% loss means the gain must be 100% to break even. Not much chance of that happening.

If you plan to have any money when you retire there is one question to ask your broker and you want a detailed answer in writing. Mr. Broker:

“What is your exit strategy?”

Copyright 2009 Albert W. Thomas All rights reserved. Author of “IF IT DOESN’T GO UP, DON’T BUY IT!”