Can Brokerage Firms (Wall Street) Make You Money?This is a tough question with tough answers. I must be brutally honest with you. I would say without hesitation that, at best, it is very difficult for a brokerage firm to make money for its customers. I am going to say some very tough things in this piece and I apologize to anyone that is insulted by what follows, but the pros know that I am right.
You Can't Meet Budget If There Is No Budget
In the brokerage industry I can walk into any brokerage office and ask the office manager who their best brokers are. They will immediately tell me that this broker grosses a million per year. This other broker grosses two million per year and so forth. What the manager can't tell me is who makes money for their customers. I am in brokerage offices all the time. No manager has ever been able to tell me which brokers are making money for their customers. They can't tell you that because they don't measure it. Now I ask you, if the firms are not measuring broker profitability per customer, what does this tell you? It tells you that it's not a managerial objective and that as a client, you're dead. Unless something is an objective, they're not trying to attain it. If they're not trying to attain it, how are they going to hit it? valuestockplayers.com could make a good case that brokerage firms are not dedicated to making money for you, the client. Brokerage firms are dedicated to maximizing commission revenue from their brokerage force, for the benefit of the securities firm. VSP would be willing to debate any executive at any brokerage firm at any time on this topic, as long as itís a public forum.
There are no HOLDS
If the Client is not King, Then Who is King?
Is the Broker a Portfolio Manager?
They can't all be buys!
What happens is that people and organizations get caught up in things. Once caught up, the behavior takes on its own momentum. You'll notice that brokerage firms never publish results of their research on a year to year basis. That's because their performance is so poor that they could not deal with the embarrassment. I know, I have been involved with firms for 30 years.
Research or The Struggle for Mediocrity
It's the same thing in Wall Street. Research analysts are not independent, and thus they are not objective. You see, their firms do investment banking business with the companies the analysts are recommending. In those cases where the company is not a client of the firm, the firm is hoping to do a deal shortly with the company. Nothing will get a brokerage firm knocked out of a syndicate more quickly than putting out a sell on the potential client company's stock.
Research analysts have careers and families. They want to keep their jobs and their careers, so they're in no position to rock the boat. They are not risk takers. Let me illustrate. In 1980 or 1981, I thought Chrysler was ready to turn after 20 years of failure. My feeling was that the government would lend them several hundred million dollars because Congress was not going to allow hundreds of thousands of auto workers to go unemployed in a terrible recession. At the time I was a limited partner in a major Wall Street firm. I sat down with our analyst who was widely respected throughout the industry and I shared my ideas about Chrysler and the political climate. He looked me straight in the eye and said he couldn't recommend Chrysler. I asked why. He said, "I don't need to hit home runs. Why rock the boat? I look for singles." Chrysler was at $6 at the time. It went to over $125 per share before I started selling. The analyst never recommended it. This analyst is representative of all of Wall Street. Absorb the wisdom I am trying to impart to you.
Can Brokers Make You Money?
2) The commission has no relationship to how well the client does. Thus, the broker and the client are in conflict.
3) Brokers are not paid salaries, they are paid only on commissions. This means every month they start at zero. They must do business to survive. Now I ask you, don't you think your broker has to buy or sell something for your account in order to generate an income for himself for the month ?
4) Brokers have brokerage licenses. This does not mean that they are security analysts, or certified financial planners, or chartered financial analysts. They do not have to know how to read balance sheets, or income statements to be brokers. Yet, all day long they are involved with stocks. The broker must have a financial understanding of these securities, but at the same time the broker does not have a background in financial analysis.
5) The cards are stacked against the broker because of the aforesaid. Even the best-intentioned brokers have difficulty making money for people because of the above.
6) Brokers are on their own. This is why I admire them so much. They are the warriors of the industry. For the most part they are unappreciated by the firms they work for. Every day they are in the trenches trying to do the right thing for their clients. The cards are stacked against them by the systems created by the firms they work for.
7) The intentions of the broker and the intentions of the client are not united in a win-win situation. So long as the broker's income is not based on the performance of the account, the client will be in trouble. Hopefully, the points I am making will be helpful to you in the pursuit of profit.
Free Trial Click Here