3 reasons not to do business with a full-commission stock broker

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3 reasons not to do business with a full-commission stock broker
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Do stockbrokers work for you or against you? The answer might surprise you.

Stockbrokers are allowed to work against the best interest of their customers. By contrast, an independent fee-only financial planner who does not work for a brokerage firm has what’s called ‘fiduciary duty.’ That simply means they must do what’s best for you.

Read more: 9 financial mistakes you will regret forever

Full-commission stockbrokers don’t have your best interest in mind

Surprisingly, many investors are very misinformed on this point. A few years ago, The Wall Street Journal’s Jason Zweig once cited a study that found roughly two-thirds of investors — we’re not talking about the general public here; we’re talking about dedicated investors — thought stockbrokers had to work for them.

Of course, some individual stockbrokers rise above the corruption and conflict to defy their brokerage house by doing what’s in your best interest. However, they’re too often few and far between. So be sure you know what most active investors don’t — that stockbrokers help themselves first and you second.

3 reasons why you probably don’t want to hire a traditional full-commission broker

Full-commission brokers don’t have fiduciary duty. If you do business with a stockbroker, you do so at your own risk. If a broker wants to put you into a bond fund, that broker can legally look for the most expensive option to your great harm. Basically, they’re allowed to pad their pocket at your expense. That’s what not having fiduciary duty means.

Arbitration is the norm. If they rip you off, your only option is typically to go to a stacked-deck kangaroo court arbitration system. Yet Congressional hearings have found that companies of all kinds actually use software programs to calculate how often an arbitration firm will rule in their favor and the dollar amount of each ruling. If a certain arbitrator isn’t up to snuff, they get fired. And get this, even if you win, you pay all of your legal fees and typically all of the brokerage’s legal fees too. So that tells you everything you need to know about arbitration!

It’s better to flat-out pay for advice. There are plenty of investment products that may not be the best choice for you, but you may be sold them by a commissioned salesperson because the commissions are just so humongous. That’s why Clark has long recommended that you consider fee-only planners. They’ll give you a fixed price up-front for their services, regardless of the product they recommend. So you won’t have to worry about conflict of interest. Check NAPFA.org and GarrettPlanningNetwork.com to find one near you.

Read more: How to get the maximum Social Security check

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Theo Thimou About the author:
Theo is director of content for clark.com. He has co-written 2 books with Clark Howard, including the #1 New York Times bestseller Clark Howard's Living Large in Lean Times.
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