Keep Your Friends Close, and Your Broker Closer

Keep Your Friends Close, and Your Broker Closer

Your broker is not your friend. Keep that in mind the next time one calls you to offer unsolicited advice. to offer unsolicited advice. Contrary to what they may lead you to believe, they're not reaching out to help you. They're doing so to generate commissions for their employer.

Maybe it's just a coincidence, but as stocks have soared this year -- the S&P 500 eclipsed the 1,800-point threshold for the first time in history last week -- I've noticed an uptick in the number of times that I and my wife have been contacted from representatives of Bank of America's brokerage division.

Recently, a polite but annoyingly insistent advisor called to let my wife know that much of her IRA is currently in cash. Never mind the astronomical level of the market; the implication was that she should convert the funds into some type of securities, most likely a mutual fund that kicks back a portion of the principal to Bank of America. While buying high and selling low is indeed something I've done before, we demurred.

The problem is that most people aren't in the financial industry and don't spend their days researching and thinking about its inner workings like I do -- for better or for worse. When you walk onto a car lot, you expect to be snowed. They're called car salesmen for a reason. Yet the same people in finance are known as advisors. This nuance seems semantic, but it's actually quite important, as it leads many investors to conclude that financial advisors, unlike car salesmen, are in some way looking out for their best interest when nothing could be further from the truth.

Let me break it down like this: What's best for you and what's best for your broker are mutually exclusive. Research has shown that frequency of trading and total returns are inversely correlated for individual investors. Alternatively, read the financial statement of any brokerage, and it's obvious that it makes more money when people execute more trades.

This, by the way, goes a long way toward explaining why financial media outlets such as CNBC and The Wall Street Journal unabashedly promote active trading despite the hazardous impact on wealth. Watch the commercials on CNBC and read the advertisements in the Journal. Who shows up time and again? Brokers and other financial professionals.

My point here is not to disparage people in the financial industry. They're just doing their jobs. It's rather to clarify what that job is and how it affects you. So the next time a financial advisor calls to offer advice, you'd be wise to remember that the broker's true purpose is to sell you something.

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John Maxfield owns shares of Bank of America. The Motley Fool recommends and owns shares of Bank of America. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Originally published