Enough Already! It’s Time to Ditch Your Broker and Become a Self-Directed Investor

I’m mad as hell and I’m not going to take it anymore. Hear me out.

Washington Sabotage

Back in March, I read in the Washington Post that brokerage firm lobbyists (a.k.a. special interest groups) were likely going to be successful in torpedoing the investor protection section of the financial reform legislation wending its way through the U.S. Congress. I shrugged off the report, confident that Congress would “do the right thing” and ignore the sleazy lobbyists with their corporate credit cards.

Boy, was I wrong; my faith in Congress was completely misplaced. No wonder that a Gallup poll recently found that only 11% of the American people have confidence in Congress, an all-time low percentage, and bad enough to rank Congress dead last among all institutions surveyed.

For you policy wonks, the legislation at issue was section 7103 of H.R. 4173, which passed the House of Representatives last December. In particular, section 7103 would have imposed a “fiduciary duty” on stock and insurance brokers to only provide investment advice that is in the best interest of their retail customers. The final financial reform legislation deleted Section 7103 and replaced it with a castrated Section 913 that only called for the Securities and Exchange Commission (SEC) to conduct a “study” of the issue. In other words, business as usual.

How could Congress side with the lobbyists against the American people? What an outrage!

Brokers Are Not Your Friend

Unbelievably, brokers have been exempt from the fiduciary standard imposed 70 years ago on investment advisors in the Investment Advisers Act of 1940. The reason for the exemption? The investment advice offered by brokers is considered “solely incidental” to their main job of selling investment products. Bull feathers.

You heard me right: your friendly neighborhood stock or insurance broker currently has absolutely no legal obligation to put your financial interests before his own.  Zero. Bupkis. Nada.  The only obligation a broker currently has is to provide a customer with a “suitable” investment. For an elderly client who is retired, a suitable investment may be a conservative bond fund.  A broker could get into regulatory trouble if he steered the client into a high-tech growth equity fund instead. But the broker faces no liability for steering the client into a clearly inferior bond fund with sky-high fees and poor performance. Thomas Currey, president of the National Association of Insurance and Financial Advisers, recently admitted that his members are out for themselves:

Most of us operate under contracts with a broker-dealer or insurance company, and you have an agreement that you’re going to look after the interests of the company. [The proposed legislation] puts a person with a contract like that in a really untenable situation. There is really no way you can equally serve those purposes.

Wake Up People!

Many people entrust their hard-earned money to brokers and yet mistakenly think that their broker is a fiduciary.  According to a 2008 study by the RAND Corporation, “individual investors typically fail to distinguish the different duties and services provided by broker-dealers and investment advisers.” In fact, 42% of investors mistakenly believe brokers are fiduciaries and 58% believe that brokers must disclose any conflicts of interest, which is also untrue. The percentage of people who think the vague category of people who call themselves “financial advisers” are fiduciaries is even higher at 59%.

Broker-Recommended Mutual Funds Deliver Poor Performance

The question remains whether the perverse financial incentives and conflicts of interest exhibited by brokers actually hurt customers. The answer is emphatically yes.  A 2007 Harvard Business School study found that:

Funds sold by brokers underperform those sold through the direct channel, even though calculated on a pre-distribution-fee basis. This is true for all equal-weighted portfolios, regardless of whether we look at raw returns, benchmark adjusted returns, or any of the various measures of risk-adjusted returns.

Wow! And to think that this underperformance occurred prior to calculating distribution fees (e.g., sales charges and marketing/administrative fees) is a double wow.  The study determined that in 2002 the distribution fees brokers imposed on their clients amounted to an astounding $15.2 billion, which is on top of the massive $23.8 billion in management fees charged — for managing funds that underperform no-load direct-channel funds Furthermore, the researchers discovered that brokers pushed their clients into funds with higher-than-average front-end loads (i.e., sales charges).  The Harvard study’s authors conclude that the data:

leaves us with the puzzle of why investors continue to purchase funds that appear to be no better at substantially higher costs.

Run, Don’t Walk, Away from Broker-Owned Funds

Are you getting the picture? Need more? A 2002 Lipper study measured the 10-year annualized performance of various mutual fund families, both independent and broker-owned. The results clearly demonstrated that the funds owned and pushed by brokerages underperformed independent funds:

Independent Mutual Funds

Fund Family

Equity Returns (Annualized)

Fixed Income Returns

Combined Returns





American Funds












Franklin Templeton




Broker-Owned Mutual Funds


Equity Returns (Annualized)

Fixed Income Returns

Combined Returns

Smith Barney




American Express








Merrill Lynch




Morgan Stanley




According to Lipper, broker-owned mutual funds underperform not only because of high fees, but because brokerages are owned by investment banks that make most of their money from M&A advisory and trading, not asset management. Consequently, the leaders of these firms are always promoted from the M&A and trading divisions, which are the profit centers.  The best and brightest asset managers have no chance of becoming head of the investment bank and leave for independent fund shops where money managers are the boss. The end result? — mediocre bureaucrats manage broker-owned funds. Yet, brokers are given incentives to push these mediocre funds.

Their Individual Stock Picks Are No Better

I’m not finished with my rant, lest you think that broker conflicts of interest only apply to mutual funds. Actually, the conflicts extend to individual stocks as well.  Investment  banks are always shilling for M&A advisory work so they discourage their analysts from issuing anything other than buy recommendations for the stocks of potential M&A clients. Similarly, trading revenues depend on hedge fund clients, so analysts are discouraged from saying anything bad about the stocks held by these hedge funds. Since brokers are required to recommend stocks from their brokerage firm’s buy list, they often end up recommending these “phony buy recommendation” stocks to customers.

Danger, Will Robinson, Danger!

But the worst abuses derive from initial public offerings (IPOs). One of the primary jobs of investment bankers is to sell securities for their capital-raising corporate clients. They get 7% of the IPOs total value for doing it. Brokers must sell these securities in order to get them off of the bank’s balance sheet and they’ll do it even if the securities are crap. 

One prime example of garbage IPOs are closed-end funds (CEFs). CEFs are usually sold for $20 but have a net asset value of only $19. They are sold without a commission, which makes gullible customers think they are getting a good deal. But the brokers are getting a hidden commission through the 5% difference between offering price and NAV. Academic study after academic study documents that buying CEFs at their IPO is a sure-lose proposition, because the CEF market price always falls to the NAV and often even drops to a discount below NAV. Yet brokers sell them anyway. A true fiduciary would never do that.

Independent Investors of the World, Unite!

It’s time for every investor in America to ditch their broker and take control of their own financial destinies. Stop paying outrageous fees for conflicted advice and underperformance. Warren Buffett has repeatedly said that small, retail investors can make 50% annually if they know what they’re doing. Believe it when I say that there are honest, un-conflicted sources of information that one can use to help pick stocks that outperform the indices.

Don’t succumb to inertia. Don’t fall asleep. Step up. You can manage your own portfolio.

Trusted Friends

For example, check out Roger Conrad’s Utility Forecaster investment service. I know Roger personally and I can honestly say that he is the best stock picker I have ever met. Not only does he have an uncanny ability to find dividend-paying stocks that increase their payouts year after year, but he fully explains his investment thesis for each stock so that you can make an informed decision whether to follow along or not. It’s all up to you.

According to Hulbert’s Financial Digest – the undisputed authoritative source in evaluating newsletter performance – Utility Forecaster has outperformed the overall stock market over each of the past 3, 5, and 10-year periods:


3-Years (Ann.)



Utility Forecaster




Wilshire 5000 Index




If you are a conservative investor who wants to enjoy both high dividend yields and near-perfect safety, you owe it to yourself to give Roger’s Utility Forecaster a test drive today. Try it risk free and find out which utilities have earned Roger’s top safety rating. You may cancel for a full refund anytime during the first 90 days, no questions asked.