Tracy Stoneman - Stoneman Law
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Choosing Professional Help - Conflicts of Interest

The number one guideline in choosing any professional help is first to determine what the potential conflicts of interest are and second to try to eliminate or control those conflicts. This article will focus on the conflicts within the brokerage industry. At the root of the problem lies the reality that brokerage firms are in the SALES business, not the money management business. The introduction of many new varieties of investments, all created by the brokerage industry, is not too different from the way Proctor & Gamble comes up with a new shampoo its done to increase sales! History has shown that brokerage firms have developed far too many products that may not be in anyones best interest, much less yours. Some limited partnership investments are prime examples.

The securities industry is not the only business that has conflicts of interest -- attorneys who charge you an hourly rate (do they really want to resolve that case for you?) to doctors who are paid more when they operate (did you really need that operation?). Within the securities field, conflicts are not just limited to stockbrokers. They can exist for anybody who sells investments and is paid based on the transaction.

Hidden Conflicts

Most of the time, the conflict is apparent in the commission charged to you. Far too often though, it is hidden. Take initial public offerings or new issues. There, the commission is hidden in the price, but the commission is one of the highest. Other securities, like some over the counter stocks, limited partnerships, annuities, and mutual funds, can sock you with exorbitant commissions. But unless you read the prospectus in detail, you may never know it.

Brokerage firms sometimes buy securities in bulk and then turn around and sell the stock out of their own inventory. However, unlike a store, they wont have a sale to move the product off the shelf. Rather, the firm will turn up the pressure on its sales force to increase sales of that investment. Stockbrokers may also be trading securities out of their own accounts, so in addition to the commission incentive, there could be a profit incentive, unbeknownst to you. For more complicated and longer term investments, like limited partnerships, the brokerage firm may be collecting management fees. More commonly, bigger brokerage firms may pay brokers more for selling the firms proprietary products. Also, for some investments the broker gets a residual payment in addition to the commission, which means he gets a percentage of the assets as long as you continue to own the investment. But you may never know these things.

You may also be unaware of other incentives that increase conflicts. When a broker transfers to a new firm, he may be offered, in addition to a signing bonus, an accelerated payout -- a higher commission for the first month or year. You can imagine the incentive that broker has to "push product" before his commission drops to a lower percentage. Similarly, at the end of the year, many firms pay their brokers based upon the percentage of commissions they generated on a sliding scale. The more commissions over a year the broker generates, the higher his percentage goes and the more money he is paid at the end of the year. Theres a natural conflict to try to generate more commissions at the end of the year based on this higher payout.

One of the worst atrocities is the sales contest. Brokerage firms will don brokers with gifts, trips or just extra money for selling over a certain amount of a particular investment during a given time period. Rarely, if ever, are you the client made aware of this. Even the most naïve investor would think twice about buying an investment if she was told that one of the reasons the investment is being suggested to her is because some broker can win a trip to Hawaii.

What To Do

Of critical importance is understanding the nature of the problem. Broker incentives to sell an investment serve to hamstring the broker and prevent him from making an untainted decision of what investments are suitable for you.. The broker is paid only when hes able to persuade you to buy or sell a security. The more trades or the larger the trade, the more money goes into the brokers pocket. He is paid whether the investment he sold you is suitable or not. He is paid whether you make or lose money on that investment. And he will be ranked, paid, and receive accolades from his employer based not on how well your portfolio has done, but rather based on how much money he has brought to himself and the firm.

As a general rule, you are better off dealing with a seasoned stockbroker -- one who has been a number of years at the same firm. As it is in many industries, it takes years to realize how little you know. Seasoned stockbrokers are also better because they have typically been burned by the brokerage firms theyve worked for and/or the various investment products theyve sold. Thus, they are more questioning of the system. If you are moving with your broker to a new firm, be exceptionally cautious the first year.

Start any interview process by asking conflict of interest questions. The easiest one is, "How are you paid?" Be alert to such answers as, "Its built in" or "Im paid by somebody else" or "Theres no commission". Such answers forebode danger. Plus, you are being misled from the get go. It is an exceptionally rare occasion when someone is selling you an investment and not making money. Be careful of a broker who says the commissions are "on the back end". The broker is paid on the front end, so the fact that you may not pay the fee until later does not erase the conflict.

Another way to lessen the conflicts to some degree is to be a client, not a customer. If you remain a customer, merely a person whom the broker calls when he has his next hot idea, the conflict remains high. You are not sure if his recommendation is based upon whats good for you or for him. This type of relationship was most pronounced at what is known as "bucket shops" or "boiler room", usually lesser known firms where large numbers of young, inexperienced brokers would all sit in a room and "smile and dial".

Once you choose a stockbroker, build a relationship with him. Have in depth conversations. Make him aware of your financial needs and goals. Hopefully through this process, you can lessen the conflicts. To a client, the broker will be more motivated to have your best interest at heart.

Contact Ms. Stoneman - Stoneman Law Offices - Texas & Colorado. (800) 783-0748 Free Consultation - Representing Clients Nationwide

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If you suspect securities or brokerage fraud against your hard-earned investments and need an advocate, call Tracy Pride Stoneman - NOW! I was a victim of churning, improper sale of unsuitable private placements, compliance violations, and more. I blamed myself at first and didn't think I had a case, but I was referred to Tracy after another lawyer balked, thinking all was lost. She took the emotion out of it, got down to the facts, made the case, and in hands-on fashion worked hard for the best result possible. She's an excellent communicator and the kind of experienced securities arbitration lawyer you need in your corner. Ms. Stoneman achieved a settlement for me that far exceeded expectations. She has my highest recommendation. Jeffrey B.
Tracy was a wonderful lawyer in my and my husband's huge case against Prudential Securities. She was relentless in going after the stockbroker and firm, determined to obtain all of the documents that helped our case and hurt theirs (that's why the firm didn't want to produce them!). No matter what curve ball the brokerage firm threw, Tracy came up with an angle to overcome it. My husband always commented how smart Tracy was in handling our case. Throughout it all, Tracy was extremely cheerful and easy to work with - unlike most lawyers I know! Carolyn W.
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