Comments on: Why Are Brokers So Hard To Understand?

By: Can you talk the talk? | Experiments in Finance

Can you talk the talk? | Experiments in Finance — Thu, 22 Jun 2006 20:59:52 +0000

[...] Financial Reflections wrote a post earlier this week asking why brokers are so hard to understand, including a list of terms found on a newsletter. I have to agree that people in finance and business (and science, sometimes) like to make things much harder and more complicated than they need to be. [...]

By: AllFinancialMatters » Blog Archive » Carnival of Investing - No. 27

AllFinancialMatters » Blog Archive » Carnival of Investing - No. 27 — Mon, 19 Jun 2006 04:43:33 +0000

[...] AllFinancialMatters is proud to host the 27th edition of the Carnival of Investing. Next week’s carnival will be hosted by My Personal Finance Blog. There’s quite a few submissions this week, so let’s get started. Here’s this week’s entries in the order they were received: 1 How to Lower Your Investment Returns: Use a Broker. 2 Triple Witching, 16 June 2006: What Does the Historic Data Say? 3 Regulatory Arbitrage Meet the Historical Inevitability 4 Fifteen Ways to Leave Your…Money 5 Special Situations Real Money Port on Fire 6 Japanese Interest Rates 7 Real Estate – Safe, Secure, Steady Money 8 The Super Bowl indicator: An AFC victory is bearish, and an NFC victory is bullish. Does it work? 9 Risk and Diversification 10 Free Cash Flow at Xerox 11 Homesteading and Declaration of Homestead 12 Unconventional Strategies In This Housing Market 13 Bring on the Bear! 14 Two New ETFs To Match Your Interests 15 Death Tax Debate 16 John Burley’s 7 Levels of Investor 17 Why Are Brokers So Hard To Understand? 18 The Week Ahead: Your Financial Road Map for June 19-23, 2006 19 Regulatory Arbitrage Meet the Historical Inevitability [link] [...]

By: Gary

Gary — Sun, 18 Jun 2006 07:09:58 +0000

With respect to a brokerage newsletter, the problem is that it is from a brokerage firm. By definition brokerage firms are specialists (hopefully). Where your confusion lies is that you are expecting “financial planning” or to receive “financial advice” from a broker — and that is just not what they do. By definition brokers only “report” financial transactions (both past and hopefully the future). That is it. They do not, and are not required or expected to, stop and explain things in terms that you or anyone outside of the profession can understand. That is not what they do.

Financial Reflections responds: That’s exactly what this person did do. He tried to send a letter out explaining what had happened to the market that was full of jargon and gibberish.

If you want something understandable, you will need a “financial planner” — not a broker. Financial planners fill in where brokers leave off. Investments are only one piece of the puzzle. Financial planners often take this piece on by following and hiring various brokers to put together a portfolio for individual clients. So the clients get a bunch of brokerage gibberish each quarter and one simplified report from the financial planner each quarter. This simplified report typically shows all of the clients assets (personal, business and investment) and it lists a bottom line performance figure. This allows clients to compare their overall performance from quarter to quarter (it is easy to see if you gained or lost money, and the financial planner can explain why either occurred if the client asks).

Financial Reflections responds: Thanks for the clarification on terms. Now that you point it out, there’s another point of confusion. What are the different job titles and what do they mean? I’m not a finance professional of any kind and I have no problem at all with someone seeking out competent financial advice. While I do try to get the facts as best I can, what appears on this site is my opinion only.

This isn’t to cast blame on you — quite to the contrary. The brokerage industry has spent a lot of money to confuse the issues here… to make you think that brokerage firms provide financial planning services. They don’t. In fact, they are expressly prohibited from doing so by the SEC regulations (aka the Merrill Rule). If you read the brokerage account forms when you sign up for their services, you will see this listed in the fine print. This has been quite controversial within the financial planning community within the past couple of years.

I am sure you (like the rest of us) see ads for the large brokerage firms, banks and insurance companies on TV and in magazines and believe that that is what these companies do. Nothing could be further from the truth. What no one has been talking about is that those very ads violate the SEC rules (as do the large brokerage firms websites). This may come as a shock to most folks. Bob Veres, the media guru that follows the financial planning profession, has written several articles about this. Yet you don’t hear it anywhere else — assuming that you are not in the profession. It just goes to show the power that the largest financial institutions have…

Financial Reflections responds: A very interesting point! Thanks for adding to the discussion here.

I hope this answers your question as to “why brokers are so hard to understand.”

Financial Reflections responds: It does shed some light on the subject. Thanks.