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Stockbrokers

In the late nineties the broking industry was massively shaken up by the forces of competition, especially the advent of internet trading and cheap online broking services. Gone are the days when brokers routinely charged around 2.5% to buy and then another 2.5% to sell. It really makes you wonder how traders ever made a living back then. Nowadays many people use 'no advice' brokers and pay much less than 1% per transaction. Online trading via the internet has become the main way of buying and selling shares and can be conducted through various online broking firms which are easily found via a search engine.

If you are new to the market though, or can find a good one, there can still be value in paying the higher rates for a broker who conducts research and offers client advice. One advantage of a good advisory broker is that the principals of many companies need good relations with brokers and therefore often tell them stuff that may not be generally known. Brokers, being in the industry, hear a lot of rumours, both good and bad, that can be very useful.

The downside is that unfortunately some brokers use clients for their own ends. If for instance a Shark needed to get out of a stock urgently, an unscrupulous broker might recommend that stock to some of their Fish or Plankton to help out the more valuable client. Other times a broker might have a vested interest in the success of a float that their company is underwriting and may sell shares in that float to clients, whether they believe in the ultimate success of the company or not.

Brokers also have interests that can be at odds with the client. I have already mentioned two of these in previous sections, keeping clients invested in shares as opposed to other types of investment despite the market being over-bought, and profiting from excessive turnover of stock (known as churning) whilst the client is obviously better served by minimising turnover and consequently brokerage costs.

Another thing to remember is that many brokers are just salespeople, who pass on the information and recommendations of analysts. Not all of them are well versed in the history of markets, world commerce, geopolitics, or even a lot of the individual stocks in the speculative market sectors. So when you ask your broker about a stock that someone mentioned to you, do not imagine that you are necessarily getting expert advice. Ask whether the firm has analysed that stock and if not, ask the broker to justify any opinion given.

An important area of broker skill is the taking and executing of orders. There is a vast difference between a good and bad broker here.

A good broker will know when to question your order and can occasionally stop you from making a mistake. They will notice when your order is running against the tide and will know when to exercise their own discretion to save you money. A bad broker will be proactive at the wrong times, will not get the best price available, will not always try and contact you if something relevant happens that may affect your order and will often cost you money that a good broker would have saved.

In my experience the best way of choosing a broker is by recommendation. Try and find either a professional trader or at least a Shark who can point you in the right direction. One of your acquaintances is sure to know a serious market player. Do not take any old Fish's advice, as they might not know the difference, whereas a Shark has probably switched brokers several times before settling on a good one.

 

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