Trust your Broker? Don’t Bother

Do you truly believe your stock broker will be 100% on your side and advise you with only YOUR best interest at heart? Well if you said yes, you have only a 15% chance to be correct. Statistics show that only “Fiduciaries”  contractually have your best interests at heart. The other 85% work for a broker-dealer that tell brokers what to do, and what to push upon you and other clients. This well kept secret, like many other Wall Street cover-ups keeps the average investor in the dark and behind the eight-ball. The Security and Exchange Commission knows all about this broker-dealer arrangement and does nothing about it. It’s all political. As I’ve said many times before, in order to survive long-term just “Follow the Money.”


In this months Kiplinger’s Personal Finance Magazine, an excellent publication that specializes in investment safety, there’s a column written by Andrew Feinberg. He manages a New York City-based hedge fund called CJA Partners. The title of his scathing article is called “Swimming in a Cesspool,” which has influenced this blog. The article begins by talking about two contacts of his old friend, who used to work for Stratton Oakmont, the penny-stock-promoting boiler room depicted in the movie “The Wolf of Wall Street.” Every day they committed felonies and ruined investors lives. Where are they now? Attica? Sing Sing? Nope, one went to Goldman Sachs. The other is at J.P. Morgan. Figures.


Wall Street is filled with jerks, and worse. The non-caring toxic culture has a way of corrupting much of what the street touches. And the regulatory agency charged with keeping things above board, the toothless S.E.C., idly stands by and watches, doing practically nothing to stop the ongoing illegal acts. They investigated Bernie Madoff for years and look how long he continued to get away with conning and stealing from innocent trusting investors. One of the most stunning stories from last year was a Wall Street Journal piece headlined “Traders Pay for an Early Peek at Key Data.” Apparently, data providers Thomson Reuters and Deutsche Borse AG peddled “inside information” on consumer sentiment data. Recent information revealed that a couple of ConvergEX brokers were going to jail (we need more of this to curtail criminal acts), because their firm had fraudulently overcharged clients by millions of dollars.


Common sense dictates that inside trading exists. Just before earnings of companies are released, there is much larger trading volume in their shares as compared to previous days. Somebody knows something and is making a killing before we get the same “public” information. Company executives would not meet with you or me as shareholders, but when an “analyst” calls for a meeting, it’s arranged, usually privately. It’s so blatant that stock pickers inside joke is that, “if you don’t do it you are just a lazy schmuck.”

Feinberg goes on to say,”‘I believe a huge percentage of Wall Street traders and brokers are corrupt.” There also exists a level of hypocrisy that is very tough to stomach. There still exists a strong Wall Street Chauvinism that denigrates women. Virulent sexism remains part of the Street’s code. He claimed that traders who work at hedge firms routinely pay inflated commissions in return for inside information, cocaine and escorts.

In Turney Duff’s entertaining memoir, “The Buy Side: A Wall Street Trader’s Tale of Spectacular Excess,” he recounts that managers at brokerage firms place huge orders designed to levitate the value of their firms fund’s holdings in the waning moments of the year. (This is illegal market manipulation, but hordes of people do it, yet the government regulators turn a blind eye.) He recounts one case where a broker noticed that the prices of all the stocks he invested in last minute was rising. It seems that the trader had clearly leaked his plans. That is called front-running and also is illegal.

So here in a nutshell is my advice to you. Ask your broker if he/she is a Fiduciary and ask for the answer in writing. If not, leave and try to find one who is . At least you know the broker will be on your side, not the company’s. Do your own research. Read annual reports especially the 10-K, you may learn an interesting fact or two. Listed in the Risk factors section (found just after the company’s business section), lists in order of importance, the factors that may adversely affect the company and its future.

Other important things to review:


1) Read Risk Factors thoroughly. It may ferret out less-obvious risks such as a disproportionate share of sales coming from a single product or division.

2) Under the Management’s discussion and analysis section in Part II, the company analyzes it’s performance with the previous year’s results.

3) Look at the section named Income Statement and look for a trend of rising sales and earnings. Usually three years are shown as well as a 5 year summary.

4) Focus on the trend in NET earnings rather than earnings per share. Many companies are buying back shares and this affects (camouflages) a drop in overall profits.

5) In the Balance Sheet section you’ll see a snapshot of the company’s assets and it’s liabilities. Zero in on long term debt. Great companies have little or no long term debt.

6) Under Notes to Financial Statements look for Note 1 it may describe the accounting method used for their reporting. If it has made a change to its methods of accounting, it renders the current years numbers compared to previous ones useless.

7) Under Auditors Report look for this very important statement. “In our opinion, the financial statements present fairly… the financial position of the company.” That means the company has honestly described its finances over the past year to the best of the knowledge of the accounting firm that is auditing the 10-K.

Good luck in becoming a wiser investor less inclined to be taken advantage of by one of the “Wolfs of Wall Street.”

Tell me about your investing history and what you have learned and willing to share with us.

I love to write and I LOVE to write for you.




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