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Home » Wise as a Serpent: The Lowdown on Stockbrokers


Mark Levitt
By Mark Levitt

This article appeared originally in the October 2007 Levitt Letter.

Dear Mark:
Please don’t lump all stockbrokers into one pot. My husband has been a stockbroker for 25 years and in the years since we were both born again in 1984 and married in 1985, he has not taken advantage of one single customer. One of my greatest blessings has been to hear him say that he could have had a great commission, but he didn’t do any business because it would not have benefited his clients. We both believe and try to live according to Proverbs 22:1 “A good name is to be chosen rather than great riches…” Honest, God-fearing stockbrokers do exist. We, too, agree that being debt free is a biblical principle, and we are. God bless you and your ministry,
—M.S.

Dear M.S.—
Perhaps it was a mistake for my article (Sidestepping Your “Friendly” Stockbroker, August ’07 Levitt Letter, www.levitt.com/newsletters/2007-08.pdf) to vilify stockbrokers rather than their industry, which fosters conflicts of interest that torpedo investors. That your husband has to choose between feeding his family and benefiting his clients is a colossal pitfall. The book License to Steal (Anonymous & Harper, 1999) reveals that brokerage firms recruit stockbrokers based on how much they earn for the firm—not for the client. More often than not, human nature becomes the culprit as brokerage firms weed out low-producing brokers. Warning: stockbrokers are salesmen, not neutral advisors. Financial expert Scott Burns (www.dallasnews.com) points out that even the most competent, best-intentioned stockbrokers are incapable, in the long run, of outperforming low-expense index funds. Note: the worst of stockbrokers are highly skilled at masquerading as “boy scouts”—the epitome of wolves in sheep’s clothing.

Why do brokerage firms insist to exempt themselves from civil litigation—an avenue of recourse that suffices for grievances against doctors, lawyers, and tobacconists? (That’s right, Dear Reader, every stock brokerage contract contains an NASD—National Association of Securities Dealers—Arbitration Clause.) Once a complaint is brought, both the brokerage and the investor have unlimited strikes in their selection of panelists to adjudicate the arbitration. Consequently, the brokerage can eliminate from the pool any panelists whose past judgments were unfavorable to brokerage firms. The panelists get paid for serving on panels and quickly figure out that if they want future work, they had better not come down too hard on brokerage firms. The downside of a brokerage getting caught mistreating its clients, I believe, is paltry enough that brokerages, on a theoretical level, owe it to their own shareholders to play hardball with customers.

To help you abide by Matt. 25:14-30 and Luke 19:12-27, please review my article, mentioned above, and consider Scott Burns’s advice about investing in low-cost, broadly diversified mutual funds at Vanguard.

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