Is Your Broker Making You Broker?

Does two minus three equal five? No, of course not – it’s false math. Unfortunately, your broker may be trying to use this math on you. It’s not enough to just trust your broker—you need to be willing to do some math yourself.

It seems more and more people are getting comfortable with doing their own math and taking investments into their own hands. In fact, J.D. Power reported an increase of 10 million new brokerage accounts opened in 2020 during the pandemic. Despite the resources available and the freedom to trade, individuals still benefit from the guidance and the assistance of skilled brokers. The problem is, not all brokers are created equal.

I had a client who was one of the early Microsoft employees. She had so much money that she had enough funds to cover herself and do philanthropy, and that’s what she wanted to do for the rest of her life. One day she called me, sobbing, because her financial broker had “unretired her,” as she put it. Suddenly her dream was shot, and she was just worrying about getting by. She didn’t even have enough money coming in to cover her expenses, and it was because her broker convinced her that two minus three equals five and led her into some terrible investments.

Unfortunately, some brokers use your money to pay themselves—with you taking 100 percent of the risk with your investments. They are taking, on average, about 70 percent of the benefit. I’m just giving you the average. Some take way more. And if you lose your money in the market, they don’t pay for it. They got paid to lose your money. They might mean well, and I’m sure they don’t try to cause you to lose your money. But if they do, there’s no negative ramification for them other than they might lose a client—if the client is paying attention. But for you, you’re out all your money.

It’s easy to get lulled into general explanations or a false sense of security with a broker, when perhaps, your money is slowly being chipped at. For example, if you have an account with $100,000 in it and you lose 20 percent in the market that year, what do you have left? You have $80,000. Now the next year, it goes up 20 percent. Wall Street would tell you that you’re even. Let’s do the math. Twenty percent of $80,000 is $16,000. Your gain would be $16,000, so you’d be at $96,000. Your net is still −4 percent. You’re $4,000 in the hole because you’re down to $96,000.

It is critical that you not only do your math but stay involved at every step of your financial plan. The numbers are our friends, but we must be able to define them because brokers and others try to use secret language on us. They try to distract and confuse us. If somebody says an investment makes you money, it better be increasing your bank account. If your bank account is getting smaller, then two minus three equals negative one. Two minus three does not equal five, right? It’s just doing your own math so you can detect when a broker is offering you a false conclusion.

As an invested individual in your financial future, make sure you are working with the right kind of broker—those who are required to put you first. That’s why you want to work with a fiduciary; not all brokers are fiduciaries. A fiduciary is required to put your interests ahead of their own, and they won’t create churn in your account to increase their commissions. They tend to be paid to manage a total portfolio of assets, and they’re usually charging about one percent. That’s who you should use to make sure that you are growing the crops best suited to your climate, and they protect them because that is their duty.

If your broker is making you broker, get out—that shouldn’t be happening. Instead, find a fiduciary who wants to do real math with you.