Prior to the new fiduciary rule. The Wall Street bully brokerage firm would use their payout structure to their brokers to generate more trading. They would pay a higher fee for the stock portion of a clients portfolio. For example, pay 1% on the stock portion and 0.50% on the fixed income portion.
This would result in their brokers using higher risk portfolios for their clients. Naturally they get paid more for a riskier portfolio. When there was a downturn in the market their clients realized more volatility than was right for their situation.
Just recently the discount brokerage firms announced ‘zero’ cost trading. No commissions to trade your account. WOW..Now you can trade everyday, for no cost.
The questions investors should be asking is, How are they making money now? When they charged a commission, it was transparent. Now we have no idea.
Or do we? The more you trade the more Wall Street makes.
A broker’s “job” is to get you to buy and sell as much as possible. That is the primary way he or she gets paid. This is a huge conflict of interest because what is good for you is bad for the broker.
The Wall Street bully brokerage firms do not make money buying the right stocks at the right time. This is a great misperception by the investing public. They believe the brokerage firms have the right information to ‘beat’ the market.
This is wrong. Because, like you, they cannot predict the future.
These brokerage firms make money when you trade stocks. There is a spread that they earn on every trade plus a commission (yes there continues to be a commission).
For example, the bid is the amount someone is to pay, say $10 and the ask the amount someone is willing to sell, say $12. When you are buying you pay $12 and when you are selling you receive $10. When the trade is completed the brokerage firm earns the $2 difference plus commission.
Therefore, being an active trader in the long run will cause you to lose money.
By employing a scientifically designed strategy and remaining disciplined to that strategy, over the long term you will win. Remember your portfolio is like a bar of soap, the more you touch it the smaller it gets.
Own equities….globally diversify…….rebalance.