Can I trust my broker?

Someone wrote to ask: "To what extent can I trust my broker? Is it a good idea to give him full discretion to trade my money without me calling the shots? Do I need a full-service broker?"

Actually there are three questions that were asked. My answers, in the same order are:

Only a little, never, and probably not!

Broke is the financial condition of your account when you place too much trust persons called “brokers.” The word broker originates from the French “brokiere," which means to open up a cask of wine. These days, brokers specialize in opening your wallet.

In 14th century England, the term broker was applied to mean a "love merchant," i.e., a pimp. Sadly, the origin of the word broker aptly fits the majority.

Unless brokers know profitable methods that successfully trade markets, or possess keen market knowledge, you don’t need a full-service broker; you are better off using a discount firm and comparing total costs.

Does the broker trade his own account? If he does so successfully, then why is he still a broker? I have never known of a broker who was also a successful trader. The weight of evidence is that brokers are not successful traders. Since they do not successfully trade their own money, why should the broker be successful in trading yours?

Beginning traders will definitely benefit from an experienced broker to assist them in their ordering and perhaps even with their stop placements. After three months, the trader should be able to place his own orders with a discount broker. However, in some cases a broker may be required to follow intra-day price action. In such a situation, because you have other things to do, you instruct the broker as to what you want done and the broker monitors the trade for you intra-day. I have no problem with that, and you should expect to pay a bit for the service.

Market-wise brokers are few and far between. Paying a higher commission rate is justified for the rare professional broker who loves his work and knows it well. It is also justified if the broker executes your trades for you, but you should always be the one making the trade selection and issuing to the broker all orders to be executed.

Here’s my take regarding brokers: A good broker is worth more than you are paying him/her. A bad broker is worth nothing at all. Call 1-800-289-9999 to check out criminal proceedings against stock brokers, and 1-800-621-3570 to check commodity firms and brokers.