Confessions of a Stockbroker. Dirty Little Secret #3 - The Preferred List...

[MrktTimingAcdmy]

I thought you would informative!

By the Market Timing Academy,

Dirty Little Secret #3

When scouring the market for investment vehicles to invest your hard earned money, I may need to put my firms interests above yours.

Unlike Investment Managers who run discretionarily managed investment accounts such as mutual funds, stockbrokers are not always in a position to put your interests above theirs. The brokerage industry is rattled with conflicts of interests that you need to be aware of.

Let's talk about the "Preferred List". This is a list of the funds a Wirehouse firm like Merrill Lynch recommends to their clients. It is the selection of funds that the research department has done extensive due diligence on and determined they are the absolute best in the industry for the firms clients. Unfortunately this is not necessarily true. In a lot of cases this list is made up of fund families that paid some sort of extra consideration to be on the list. It's also interesting how often the firms proprietary funds end up on that list. Hence, if you are a client of Merrill Lynch, you will typically see quite a few Merrill Lynch funds on that list. As a matter of fact, when I worked for my first firm, I had access to multiple fund families, but what was interesting is in some cases I was paid a higher commission on the "in house" funds. Especially when the firm was launching a new fund. I'm certainly not saying I did this, but when you are a struggling young broker on 100% commission, it can be tempting to let how much you get paid drive your decisions on what funds to recommend.

Another lesson I learned about the "Preferred" list was highlighted when I left my Wirehouse firm (i.e. UBS PaineWebber) to go Independent. Going independent meant I stopped working for a large Wall Street firm to start my own investment firm. The reason most advisors do this is to increase their "payout" on commissions. For example, by going independent I was able to raise my payout percentage from 33% to 92% on fees generated from my clients. The reason the payout is so much higher is I'm now personally responsible for my own overhead (i.e. office rent, utilities, etc.). Taking into account all overhead costs my ultimate payout as an independent was approximately 65%. You might ask why more financial advisors don't go independent? One of the reasons is Financial Advisors, as well as their clients, are under the impression they have access to more product when working with a major firm. Boy is this not true in the least!

As a matter of fact, when I went independent I discovered the opposite to be true. I actually had access to significantly more product. How is this possible? There are a few reasons. The first is simple. A new investment offering might be too small for a major Wall Street firm. For example, a new fund might only be looking for $100 million of investor capital. This size deal is much to small for a major Wall Street firms distribution system. Furthermore, most major Wall Street firms will not be able to make enough money off the offering to justify going through the process of offering it to their clients. The problem with this scenario is obvious. Just because the offering is small does not make it a bad deal. Quite the contrary. Sometimes the smaller the raise, the better for the fund manager, as he can be much more selective in the investments he makes.

For the rest of the article, visit the Market Timing Academy's website.

[riannewalter]

Offers reliable newsletter that has a remarkable success on stock
picks! Get it for free!

Click here

Premium Stock Picks