Be Skeptical of Your Broker

Posted by on Nov 24, 2018 in Finance, Investing, Investment | 0 comments

You don’t understand the market. I get that. You don’t have to. It isn’t your job. That’s why you have a broker. But here’s the thing: are you sure your broker is treating you fairly?

You might immediately and unequivocally answer “yes,” but I’d caution you to take a moment and think about that answer. How do you know? Because, so far, you’ve been making decent money on your investments?

There are an unfortunately large number of examples I could draw from to show that your broker may not be acting as responsibly with your money as you expect them to be and as they claim to be. For the purposes of this article, though, I’ll just choose one: LJM Capital Preservation and Growth Fund. This situation all came to pass earlier this year, so it’s recent, and it’s had very real costs for a lot of investors.

What happened was LJM was not investing, as it claimed, primarily in capital preservation. Instead, they were taking huge risks in the market and not preserving enough capital in the event of a down market. When things went wrong, they really went wrong, costing 80% of the company’s stock and as much as $600 million of their investors’ money.

Some businesses make poor investment choices and lose money, that isn’t news. What is news is that many brokers sold LJM Funds without disclosing the risks to their clients. In other words, investors expected their brokers to put their money in relatively safe, modest growth stock and ended up extremely exposed and losing a great deal of money.

This all happened because too many people trusted their brokers to always be making good decisions with their money. They expected their brokers to always notify them before making a risky investment. They expected to be kept in the loop and to otherwise know their broker was shifting money safely between stable, conservative investments.

They all expected those things, and they were all wrong. Thankfully, lawsuits against these brokers and their brokerage firms may recover these losses for those who were innocent investors unaware of the risk, but that doesn’t diminish the lesson here.

Your broker may be completely upstanding. They may fulfill their mission to provide you safe, reasonable investments that keep your portfolio diverse and your earnings growing. You should have trust in your broker if they’ve proven they are reliable and open with you in the past. However, it doesn’t hurt to have a little more skepticism in relation to your broker, even if you’ve been with them for years.

Try to be a little more skeptical and verify with your broker instead of just trusting them. Do a little research about your portfolio. It might be an evening you waste just finding out your broker was as good as you thought. Or, you may discover you are at a far greater risk than you imagined, just like those unwitting LJM investors.

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