Saturday, April 26, 2008



I congratulate the CTV for having the guts to light a fire under the brokerage business and expose the total disregard that can exist for your money! But, alas, don’t wait for anything to change anytime soon! Too many people are making too much money pretending to be working for you!
Lets track down how all these evil deeds might be able to take place even in the biggest nanny state (province technically) in the nation, Ontario! It is as simple as following the money that leaves the customer account and figuring out where it ends up!

Ø Your broker wakes up in the morning and says “should I spend hours researching the stock universe for a truly undervalued stock for my loyal customers……or should I pick up the brokerages list of “action stocks” I should be pushing….er recommending”. Assuming I go with the list I can always claim I only recommended the stock after diligent research including logging onto my company website and reading the list! This effort is rewarded by soliciting a sale and earning a few hundred bucks for myself and the mother corporation!

Ø For those following at home, try to picture about 10,000 brokers sharing the same morning exercise and multiply by about $200. per….hmmmm quick math gives me about $2 million and its not even coffee time yet!

Ø Now the math gets tougher because we need to balance debits and credits….I learnt that during my week as a teller! That means client accounts must go down by $2 million as well. So when you get up in the morning and have your coffee, you have already helped the economy grow….and by economy we do mean the brokerages/banks in this example!

Ø Now the bad part for your broker is that they need to split the commission with the parent corporation so your broker has only actually made $100. from your account this morning…although you of course have lost an additional $100 to feed the bank/brokerage.

Ø Of course the neat part for the broker is its only the morning and they have about 200 other pigeons… I mean customers…they can repeat their efforts with in the afternoon.

Ø Now comes the tricky part….the trades are reviewed for ‘suitability” to, you know, protect your interests from some stupid trade that might not be necessary. Now who provide this quality control check in the brokerage world? It would be the branch manager. The branch manager is an experienced broker who has learned all the tricks and can spot a poor trade with his/her eyes closed. For doing this diligent job the branch manager receives compensation. Now think back again to the $100. that the brokerage/bank has made. Would you be surprised to hear that the manager was in on the skim and might make an income based upon how much revenue is generated by the broker? This override on revenue generated should be just the incentive to keep the manager from actually opening those eyes we discussed!

Ø Thankfully the companies all have hard working and honest compliance folks who truly do keep a diligent eye on what trades are taking place. Now the skeptic might ask who are they looking to protect….customers or brokers? You see, if too much money is skimmed (think of Vegas) then the authorities (security regulators) might actually look real close at what is going on. Rule #1 is do not kill the goose!

Ø Now you the customer might eventually get upset and begin to see what is happening. Your complaint goes to the branch manager, who then evaluates your complaint with great concern. The focus is clear: might this complaint be big enough to harm the “goose”? Fortunately, the little guys known as clients are rarely of a size to do any significant harm to the goose. So your complaint is actually a request to the broker to potentially lower his/her income in return for which they will get an angry broker and lots of paper work.

Ø Now we are back to multiplication…..if the goose is exposed to too many complaints it may actually actually get sick. The branch manager (goose keeper) will, if push comes to shove, choose the goose over the individual broker! That’s because the system only works if the customers remain ignorant of the skim. If a dozen small complaints roll up to a regulator there is once more a potential risk to the goose.

Ø Hold on though! The industry has a secret weapon up their sleeve. The regulator is funded by the brokerage/bank. Indeed the full circle is now complete. Your money funds the broker, the branch manager, the compliance team, and the regulator! The only person not profiting would appear to be…!

I know this has been a long exercise, but remember, it’s only 10am. This industry still has the bulk of the day ahead of them! At a collective $2mm a pop, we should be thankful that the stock exchange does not share the 8-8 philosophy of the green bank!

Disclaimer: I really do want to point out that not all 10,000 brokers in the above scenario are churning accounts. The fun part of the game is you don’t know which ones are churning and which ones are working hard for their clients! A BIG clue can be found in your monthly statement! The better brokers are moving to a flat percentage fee where high trading is less of a concern for clients. If you make more than 10 trades a year maybe you should be talking with your broker……if they are back from Tuscany!
I think I am beginning to see why they are called brokers…….when they are done, we are broker! soismike

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