Does going with an independent investor hold any hidden risks?
October 18, 2010 9:06 AM   Subscribe

Our Investor is going independent. Anything I should be aware of before following him?

My mother has had the same stock broker in charge of much of her money for the last 20 years. She's been happy with him. Other than the recent crash he's done well for her. He's very easy to communicate with, which is very important to her.

He has been, until now, the vice president of a major investment firm (a local branch). But my mother received a call yesterday that he is retiring from the company, but will be in business for himself as an independent stock broker. He said that 80 percent of his clients were moving with him, and hoped she would as well.

She wants to move with him also, and upon hearing that I had no problem with it. Seems logical. However, not knowing much about the stock market, now I'm a little bit weary of not knowing if this changes anything.

I have no idea if a firm has anything in place that would protect her that an independent would not. Or if there are more risks going with an independent.

Any advice one way or the other would be greatly appreciated. If anyone has questions or advice they'd rather not share openly you can email me at crossroadblues at
posted by anonymous to Work & Money (2 answers total)
How will he make his money?

If he makes his money by getting paid a little every time she trades stocks, then he has an incentive to encourage her to trade a lot even when it's not a good idea (and for almost everyone, trading a lot is not a good idea).

If he gets paid a percentage of the wealth he manages, then he has an incentive to grow her wealth (whether he is competent to do so is another question, but at least your incentives are aligned).

"She's been happy with him. Other than the recent crash he's done well for her."

Other than the recent crash the stock market in general did well for people, so that he did well is not a testament to his skill.

Your mom should consult a personal financial advisor who she has to pay an hourly fee to for advice and who does not collect commissions. In addition to helping her determine whether she should stick with her current stock broker for her stock investments, a neutral personal financial planner could help her figure out how much she should be invested in the stock market vs. other investments, and also go over her other financial planning needs (insurance, estate planning, etc.) and ensure that those are being adequately met.
posted by Jacqueline at 9:28 AM on October 18, 2010

Jacqueline has some very good advice. A couple things to add:

(1) You should ask whether he will be receiving commissions from particular mutual fund companies. If so, he will have an incentive to push her into those funds, not because they are better, but because he earns money on them.

(2) Being paid a percentage of the wealth that he manages does not necessarily align their incentives, since he will be paid even if she loses money. Plus, his expense ratio may be quite high - 1% or more of assets. By comparison, she could invest it all in a balanced Vanguard fund that charges one-fifth as much.

In general, you/she needs to know exactly how he will be paid, whether there are any hidden costs (for example, extra commissions for trades), and whether he has any hidden conflicts of interest.
posted by googly at 2:12 PM on October 18, 2010

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