INVESTING FOR THE NEW GUY

Here is a short series on how it works. How does your broker get paid, and how to get the best bang for your buck. Happy Investing

INVESTING FOR THE NEW GUY
Part One
 
When the phone rings in the bull pen, (not the one on the baseball field) but the one on the first floor of your brokers office, everyone who lunges for that call imagines sugar plums dancing in his head, and no one wants to get sour grapes. I hate to sound harsh here, but this is the way things go.
 
If the guy on the other end of the phone is talking in millions, you got a whale, (or sugar plums), however, if the guy on the line is talking fifteen hundred bucks, you got a piker. No one wants a piker (A derogatory term for a small investor).
 
I reality, it takes more time to take care of the guy with the fifteen hundred than it does with the guy who has a million. In terms of money made, they little guy may make you fifty bucks, while the other guy just paid you ten grand in commissions. It doesn’t take a genius to figure out where to spend your time.
 
At this point you are probably crying foul, but there is little one can do about it. Every broker has to start somewhere, and that somewhere lies in opening and funding two thousand dollar IRA’s. Every guy who is putting in those two grand trades is thinking jealously about the guys on the thirty-seventh floor who are handling the whales and their two million dollar trades.
 
So how do you get the same level of care, or do you? Bottom line is you don’t. A financial advisor cannot make a living today by placing orders for two thousand dollar mutual fund tickets, or ten thousand dollars ones for that matter. It takes just as long to write out a ticket for a half a million dollar trade in a mutual fund as it does to enter a trade for a five hundred dollar purchase.
 
There are two ways a financial advisor can be paid. When I was in the business there really was only one way for most of the time I was a broker. For stock trades you got a flat commission, usually from $25 - $120, and you pocketed a third of that, while the company kept the two thirds.
 
Everyone loves mutual funds and annuities. You get a flat fee that reflects a percentage of the dollar amount of the trade. This could range from fifty bucks to fifty thousand dollars and all in the space of a single five minute phone call sometimes.  The firm kept two thirds of that fifty thousand though. I can recall making maybe fifteen thousand net on my biggest trades, and yes quite often it took a five minute sales pitch to get it done. On the flip side, I recall making a slight trading error and the mistake cost the firm 55,000 dollars. I had to write a check for that in order to retain my job; I wrote the check.
 
The whole reason I have brought any of this up is to give you a little insight in the business, you just should know a little about how the business works so you can make better, more informed decisions. If you know what motivates the guy on the other end of the line you will know how to get the most bang for your buck. It is important to know how he makes his money and to understand that no one works for free and neither does he.
 
In the second part of this article I will go over some options you have and why I have chosen those options over others. So, get out that piggy bank, crack it open, and be prepared to invest.
 
Happy Reading and Happy Investing.

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