The broker functions like a salesman but, unlike someone pushing vacuum cleaners or refrigerators, simply persuading you to write a check does not legally constitute doing his job.
Brokers have a legal responsibility to make sure that each and every recommendation they make is suitable for you, your financial circumstances, goals, and objectives, and your level of understanding. Anything less than that, whether done out of greed for a commission or mere stupidity, leaves the broker liable for resulting losses.
“Unsuitable investments” are inappropriately risky, such as junk bonds for a conservative retiree.
It may also be something that is inappropriate, such as a costly insurance product like a variable annuity with a “life insurance kicker” sold to someone with no real need for the insurance feature; if the insurance tie-in significantly increases costs or erodes the client’s investment — and those things can happen — then the investment was unsuitable.
It’s also worth noting that “unsuitable” does not necessarily mean investments that lose money when they were purchased expecting a profit; a broker is not liable for losses that are a normal part of investment ups and downs, so long as they clearly explained in advance the possibilities and circumstances that could lead to losses.
“Suitable investments” can lose money. While that’s obviously not the intent, the market makes fools of many money managers and brokers; a broker is not liable for losses that are a normal part of investment ups and downs, so long as they clearly explained in advance the possibilities and circumstances that could lead to losses.
What is suitable, therefore, is defined by you and not necessarily the broker.
An interesting anecdote about that involves my father, who once had a broker who suggested what amounted to a high-cost, high-risk regional bank mutual fund. My father asked for my thoughts, and I told him the investment was inappropriate given his conservative nature, his outlook, and his needs. When my father told the broker that he would not be investing, the broker went off, asking whether my dad thought that he knew more about investments than the broker did. My father explained that the broker knew more about investments, but not enough about my father. (He subsequently stopped doing business with the broker.)
While you want a broker to present you with opportunities and reasons why you should — or should not — buy or sell a stock, bond, or mutual fund, the broker’s first job is to get to know you well enough to only present you with opportunities that meet your needs. If the broker doesn’t know you — if he has just called on the phone, for example — and he does not ask a number of detailed questions, you should wonder whether he has enough knowledge to adequately do his job.
If a broker continually suggests investments that you consider inappropriate, that he thinks are “perfect” for you — like the idiot trying to sell my father the regional bank sector fund — he has failed at Job One, getting to know you.
Discount brokers are exactly what they sound like. They execute trades at reduced commission rates, but typically with fewer services like research and counsel. Thus, if you are seeking an advisor with whom you can have a lifetime relationship, cheaper may not be better.
Typically, a discount broker does not offer the same breadth of research that you might expect from a full-service broker, but may make additional research available for a fee. And unless you plan to trade regularly, you may not work with anyone at a discount brokerage firm on a regular basis. Instead, you will get the broker who is available to process your trade, a far cry from the comfort and assurance you can get from a long-term relationship with a full-service broker.
With the evolution of online brokers and the incredible suite of tools many offer, the traditional “deep discount” broker has pretty well been moved to cyberspace. It’s ideal for the do-it-yourselfer, but the person who needs more assistance will need to pay for it.
Do what you can to get a great sense of the advisors you meet; you want this to be a hard choice, a decision where you feel like there’s no wrong answer.
Anyone can say they’ll make you lots of money. Follow your gut instinct more than your greed instinct.
Remember, there’s no limit to the promises stockbrokers can make, only to the promises they can keep.