17 Using a stockbroker

Introduction

Woody Allen once defined a stockbroker as ‘someone who takes all your money and invests it until it’s gone.’

Broker-dealers and stockbrokers have been discussed in Chapter 6.    Stockbrokers will offer both advisory and discretionary services on a fee or commission basis.  With the former, the stockbroker checks with you on all buy and sell decisions; with the latter, you authorize him to trade on your behalf. These are different from the services provided by Investment Advisers (IAs) in the US and Independent Financial Advisors (IFAs) in the UK, which have been described in Chapter 6.

This chapter is specifically about advisory stockbroker services for individual shares.

Registered representatives/stockbrokers

There are significant differences between the US and UK.

US

In the US, stockbroker firms, or brokerages, assist clients with share selection, making use of registered representatives (RRs) who are primarily securities sales people who may also describe themselves as stockbrokers/account executives, financial advisors, financial consultants, or investment consultants – all offering a ‘full service,’  No wonder it’s confusing.  RR’s may be employed by brokerage firms or act as independent contractors.  They owe a duty of care to clients but not a fiduciary duty.  They are bound to point out that they are not providing an Investment Adviser service where a fiduciary duty is owed.  Whereas IAs stress that they must act solely in the interests of their clients, a broker is less constrained and his interests may not always be strongly aligned with those of his clients.  For example, brokerages often employ sell-side analysts to promote – sell – the  shares of various companies to institutional investors and fund managers, in the hope of earning a commission.  A stockbroker may recommend the same shares to retail clients, to achieve some momentum!  Or, he may over-promote a particular product to a client or encourage his client to trade too often. […]