INVESTOR’S TIPS: The Problem with Today’s Brokerage Services
There was a time when being a stockbroker was an easy, polite and profitable affair for all parties involved. Within the investing community of yore, there was the pervasive feeling that if you hired the right broker, you were sure to beat the market.
All of this came to be, of course, since brokers, whether functioning as members or owners, exerted great influence on the exchanges. These trades were run as almost-non-profit clubs or utilities to support their given members.
With such a monopoly on liquidity and access control, brokers were soon benefitted by the general misconstruction that actively managed investments will always do better than the passively managed.
In reality, the truth is steered heavily toward the fact that actively managed portfolios tend to underperform in the market for various reasons.
One of the most important reasons is,in many cases, when trading or investing through a broker, you need to pay a commission or trade fee. This fee varies greatly from one brokerage service to another – mainly due to the broker or firm’s reputation or if we’re talking about a full-service broker or a discount one-, but even online discount broker companies will charge a $5 minimum fee per trade.
$5 per trade with you doing all the investing work. So, if you hire an actual broker to invest in your regard, you’re looking at a much higher commission, which can also end up including advisory fees.
But, why is this a bad thing? Well, it’s simple. The more fees you pay per trade, the less in returns you’ll get over time.
And if you add to the fees the risk that your broker might botch your portfolio, then the advantages of having a brokerage service nowadays becomes exponentially harder to find. The main reason to fear mismanagement is closely linked to our first downside: the fees. Since every broker charges a commission per trade, there’s the potential risk for excessive trading.
This happens when a broker sells and buys stocks back, over and over again, to increase commissions and fill their own pockets. Another risk you take when hiring a broker is, they may choose investment avenues that don’t fit your style or interest just to receive a company incentive or bonus.
Many investment firms dabble in the business of selling new securities issues to large institutional and retail investors in the primary market. Since they own the new security issue as part of the firm’s inventory, they also take on some of the risk. This risk is not shared by the issuer, for which the shares’ payment is guaranteed by the investment firm as an underwriter in these types of transactions.
These inventory stocks will, of course, become a priority sell for the brokerage firm since they will profit from the price difference. This leads these firms to offer bonuses to their brokers if they manage to allocate these stocks within their clients’ accounts, regardless of their best interest.
Another important reason for the disenchantment with the current brokerage landscape is what investment author Burton G. Malkiel explained in the 1980s with his book: A Random Walk Down Wall Street, the fact that many simply lack consistent skill at timing markets or picking winning stocks over the long-term.
The odds are certainly slim that you can find a broker who can actually beat the market consistently if you don’t have a few hundred thousand dollars to manage.
And if you do, does the risk outweigh the reduced returns due to fees?
The world has moved past brokers and gone closer to the way of passive management investing, with index funds and exchange-traded funds, which have been growing very fast.
But the fact remains that a brokerage is still necessary in some cases. Like when you’re interested in foreign stock trading. Sadly, for non-citizens of many local markets, one of the few ways to invest in them is through an international stock broker.
This type of foreign investing comes with its own added set of fees that can – in most markets do – pile up with capital gains taxes.
But there is an alternative to foreign investment and trading that’s coming out of a new and innovative project from the FinTech sector. This company – which is a startup on their private sale phase – is a holding company of a consortium.
They’re creating a global stock market easily accessible to any kind of investors to trade almost any listed asset with trading fees close to zero. They’re calling it the NAO Index, or New Asset Class Offering index, since they are run by this new asset that mixes the liquidity of a publicly traded stock with the benefits of a private-owned share.
This new asset class is a liquid instrument that has intrinsic value, will benefit its holders with annual dividends, and will be the base currency for all transactions that take place within its global trading ecosystem.
Sound completely unbelievable, right?
Well, the good news is that you can know all about it and see for yourself why this project is making such big waves, by just clicking the link below.