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Summary: Warning: Stock Brokers Can Be Dangerous to Your Wealth!
Review: You need to pick a broker more carefully than you pick a physician or a lawyer. Do you know how? Even those who think they know what to look for may not. I recommend that anyone who has a brokerage account read this book. Brokerage Fraud may be the highest return investment you make in 2001. As the authors point out, many of the 650,000 stock brokers are honest, hard-working people you can trust. But there are also firms run by criminals who are simply out to separate you from your life savings. In between, there are conflicts of interest, temptation, and bad habits that can be costly to you. The best way to keep your money safe is to know how to select, work with, and monitor your broker. Should you have a problem, this book points out when and how you should try to seek redress. But don't expect to succeed or to recover what you lost. Most people wouldn't be able to write such a book. Problems with brokers normally are handled through arbitration, as required in the contract you sign when you open a brokerage account. The results of such arbitrations are usually secret. Ms. Stoneman has worked as an attorney on arbitrations in this area, and can speak from her experience. Mr. Schulz was a stock broker and does expert witness work during arbitrations. In the foreword, Kurt Eichenwald (senior writer at The New York Times and a best-selling business author) notes, "Don't pay brokers for trading -- just for making money." But you'll have a hard time finding a broker who will be willing to get paid on that basis. As the old saying goes, "Where are the customer's yachts?" In 2000, the average stock broker had an income of $180,300 and was part of a household with a total net worth over a million dollars. How many of their customers are doing as well from their investments? The basic problem is: "Every day hundreds of investors are defrauded of millions of dollars. Yet the vast majority does not pursue a remedy." Part of the problem is that the brokerage firms deny doing anything wrong early in the game. Complaints not in writing will be ignored. Write a complaint without an attorney to help you, and you may weaken your case. Legal redress is going to be expensive . . . even on a contingent fee basis (often running from 33-50% of the recovery). Many people don't know that SEC regulations grant many rights to investors in dealing with their brokers. This book explains what those rights are. The horror stories of what to avoid are worth the price of the book. For example, if you place an order on-line that disappears, you may call up and be told it is gone. So you place another order. Sometimes, the first order shows up and you have two orders -- both of which are executed. Some firms will stick you with the problem. In extreme cases, this may trigger a margin call and you may get sold out of both positions at an enormous loss -- even before you know you have a problem. My advice after reading this book is: NEVER PLACE A DUPLICATE ORDER ON-LINE! Some of the basics are covered here too. Did you know that the higher the commission rate a broker receives, usually the higher risk an investment is? I learned this the hard way after buying into limited partnerships. A friend told me that his wife was an auditor for the IRS, and had never seen a limited partnership that paid a cash-on-cash profit (ever after the tax benefits) in all of her years of auditing. Since then, I don't buy limited partnerships. Did you know that the SIPC insurance only covers when the firm goes insolvent, not if you have a claim against them? The biggest crooks disappear without paying any of the arbitration awards charged against them. The book does a fine job of explaining how brokers are paid to move the financial products that earn their firms the most money, not the ones that best fit your situation. There is a hilarious example of a Bear, Stearns sell-side analyst writing optimistically about a company headed for bankruptcy after Bear, Stearns did some bond underwriting for that company. In the meantime, the financial press was correctly warning that the company was headed down, down, and down. There are lots of good suggestions for how to check out a brokerage firm and a broker (including seeing what complaints have been made). I was impressed with the suggestions for how those with larger accounts can get help unraveling problems at on-line brokers. The descriptions of what's going on at those firms that call me three times a day saying, "This is Joe Quick Fingers, and I work with the Fly by Night Investment Bank. I just want to give you a few recommendations, and let you see how they turn out.." were priceless! These calls are often from boiler rooms, and you will find out why they are usually lethal to your wealth. You will also find out about which brokers routinely clear trades for boiler room operators, helping to give Fly by Night Investment Bank a false patina of legitimacy. In between, there are standard methods to clip you like front running, taking kickbacks, putting a trade into the aftermarket when the spreads are larger, and just plain churning (unnecessary trading). If you do get taken, you'll know if you can hope to succeed and how to get help. I really hope you won't need this part of the book! Be forewarned in order to keep your money safe . . . before, during, and after you invest!
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