Here at The Motley Fool, our aim is to educate, amuse, and enrich you with information about personal finance and investing. Today, we're going to do that by introducing you to the top 10 signs you might be making your broker rich. And here they are. Drum roll, please:
10. Your broker sends you a gold-plated Christmas card.
9. His other office? The ninth tee at Pebble Beach.
8. You mysteriously receive an unsigned thank-you card the day your broker moves into a new 5,000-square-foot mansion.
7. Your brokerage statement includes a line item for "gratuity."
6. He slips you a dog-eared copy of the Horchow catalog and says, "Feel free to get a little something for yourself, too."
5. You get a bill for his kids' annual 529 account contributions.
4. You're listed as a credit reference for the loan on his third house in Aspen.
3. He proudly displays Management Secrets of Andrew Fastow on his bookshelf.
2. The fine print on your brokerage statement reads, "Returns adjusted for 2006 Jaguar XK and 50-foot yacht."
And the No. 1 sign you might be making your broker rich: Every time you open your mouth to speak, your broker exclaims, "And now let's have a word from my sponsor!"
Congrats if you had a nice laugh thinking about the suckers who actually got duped by such a snake-oil salesman. But if you feel like one of those suckers -- and haven't we all been there? -- then, dear Fool, read on. We'll show you how to protect yourself from outrageous fees and still earn superior returns.
How to (not) lose it all
The leading destroyer of good returns in any portfolio is fees, Fool. There are dozens of firms out there that will charge you outrageous sums to manage your money ... and manage it poorly. I know someone who found himself in that unfortunate camp. He didn't hire Grayson-Moorehead, but the service he received was hardly better than what the faux firm claims to deliver in its Saturday Night Live spoof.
So, before you hitch your wagon to a professional money manager or a full-service broker, ask these two Foolish questions:
1. What's your track record? You don't ask the guy at the hot dog stand to do your laundry, right? The same is true with your money. Don't let anyone lacking a long-term track record of selecting market-beating investments near your portfolio. I mean it. Get audited investment results that provide at least a decade of superior returns. Ask brokers about their best investments and why they made them. And demand references from other clients.
2. Have you ever been busted? Some brokers play fast and loose with other people's money. And, like former Tyco chief Dennis Kozlowski, these folks usually get busted. You can find out whether brokers stand among the bad guys by checking their history of sanctions through the Nasdaq's parent, the National Association of Securities Dealers.
There are probably dozens more questions you could ask, but you'll do fine if you get good answers to just these two -- with an emphasis on the "if." The sad truth is that you're likely to get overcharged and underserved by most managers. The good news is it doesn't have to be that way.
Go it alone
With a little time and research, you can make your own market-beating investments. And we can help. Our Broker Center has the goods on getting started cheap, and our market-beating investing newsletters feature dozens of lessons designed to make you a better stock picker. Take a risk-free trial to any them, on our dime.
Or go with a full-service broker if you must. But if you do, make sure you ask the right questions, pay only appropriate fees, stay away from crooks, and steer clear of those plying gilded Christmas cards. You and your portfolio will be the better for it.
This article was originally published on Dec. 7, 2005, by Tim Beyers. It has been updated by Katrina Chan, who does not own shares in any company mentioned. The Motley Fool has an ironclad disclosure policy.