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Post of the Day
December 15, 1998

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Subject: Don't Get Taken for a Ride
Author: SpyontheWise

The "Eyes on the Wise" segment was right on the money. It is not a case of a few bad brokers, like the Wise would have you believe, the whole system is broken.

I am a Fee-Only Certified Financial Planner that has worked in the financial industry for 10 years. I have worked on trading desk on Wall Street and now run my own investment management firm Foolishly. I have never taken a commission in my life and never will.

My Case Against the Brokerage Industry

Pressure: The compensation system at brokerage firms creates intense pressure on brokers to generate a high volume of commissions.

"Brokers are given extra incentives such as Rolex watches and all-expense-paid vacations, to sell high-profit margin products (i.e whole-life insurance or variable annuities) with little regard their customer suitability."

Incentives: Brokers are given extra incentives such as Rolex watches and all-expense-paid vacations, to sell high-profit margin products (i.e whole-life insurance or variable annuities) with little regard their customer suitability.

Bad Advice: Firms push brokers to recommend in-house mutual funds, where the firm earns management fees, instead of funds run by outside managers. Most in house funds [have] mediocre performance records. (This [is] why most investors are not told about indexes or spiders(SPY))

Bonuses: Many firms recruit top "producers" (churners) from other firms with huge up-front bonuses and extra high commissions. That gives the producer an added incentive to promote excess trading. (he/she is now getting a larger slice of the commision pie)

Poor Information: Firms don't provide customers an overall net return on investments and aggregate commissions they have been charged. If this basic information was ever revealed to the investing public, the brokerage industry would disintegrate. Game Set Match.

"Many firms recruit top "producers" (churners) from other firms with huge up-front bonuses and extra high commissions. That gives the producer an added incentive to promote excess trading. (he/she is now getting a larger slice of the commision pie)"

If you don't want to manage your investments yourself:

First max out your 401k using index funds, buy term life insurance if you need it.Than find an advisor that is paid a management fee of 1% or less that uses individual stocks, bonds and/or indexes. This puts the advisor on the same side of table as the client. If you make more he makes more. Demand that he/she provide a performance statement that clearly shows a net rate return and total fees quarterly. This statement should also have benchmark returns of various indexes for each asset class. It is sad to say that not one major bokerage firm will give this info. A salesman tells you what you want to hear [but] an advisor tells you what need to hear. Don't get taken for a ride, many investment products are hazardous to your financial health. Keep it simple, invest in individual stocks for the long-term and ask for a net-rate of return.

Fool On,
"The Spy on the Wise"

P.S. Some great books to read:
"Stock for the Long-Run", By Jeremy J. Siegel
"Secrets of the Street" by Gene G. Marcial (he was Business Week's "Inside Wall Street" columnist)


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