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Why You (Unfortunately) Can't Trust Your Broker

By Dr. Steve Sjuggerud
Tuesday, January 31, 2017

This makes me so mad, I want to scream...
I recommended a simple investment. Nothing exotic about it at all.
Then we got an e-mail from a subscriber... who was unable to buy this investment – a boring exchange-traded fund (ETF) – through her regular broker.
I believe her broker lied to her about why he wouldn't let her buy it. To top it off, the broker insulted me as part of his reason.
This could be an isolated incident. But I doubt it. And now I'm curious about how widespread this is... because signs point to a growing problem in the financial industry.
Last week, Bloomberg reported on what's REALLY going on here:
Morgan Stanley has a message for the exchange-traded fund world: Pay up. Or else.
The firm has told some fund issuers to pay a fee or risk having future offerings blocked from its sales network...

Look, I'm definitely not singling out Morgan Stanley here. I don't know which broker she tried to use. It could have been any of a number of firms. But if this is a problem in the industry, then it's likely going to get worse.
Here's what my reader wrote to us:
My broker will not allow me to buy this ETF. He told me their analysts performed due diligence... and as a result, their clients will never be able to buy an ETF released from [XYZ] Funds.
"Our firm does its 'due diligence' on various money managers... Your newsletter writer does not have the resources to do that..."
Can someone explain to me how it is that Steve can recommend an ETF so highly, and yet one of the big brokerage firms will not allow their clients to buy it?

This would be funny to me if it wasn't so darn terrible...
My reader thinks that I'm the bad guy, recommending an "unsuitable" product. Meanwhile, the reality is the exact opposite...
Here's the likely reality: This has nothing to do with high and mighty "due diligence" by the brokerage firm. Instead, it's a dirty mafia shakedown...
I understand the point of due diligence. If someone comes out with a triple-leveraged Bitcoin ETF trading in Dubai, I can understand why it wouldn't be approved for customers. But we're talking about a boring U.S.-stock ETF. It doesn't make sense.
I could be wrong about this, as I don't know the specific broker or the confirmed reason... But I think saying the brokerage did "due diligence" is to cover up the truth that it's "pay to play." The brokerage firm doesn't make much money when a customer buys ETFs. So it wants those ETFs to pay a fee, or risk being blocked.
There are other possible reasons... For example, the brokerage might have a better financial relationship with a different ETF firm. I don't know. I just know it's wrong in this case.
When I called management at the ETF about this issue, they were scared of being pointed out, for fear they won't ever be a part of the major firms... Even the shakedown fee (the payment) doesn't guarantee their fund will pass "due diligence." That's why I'm not naming the ETF in question.
Look, it's fine for a brokerage firm to try to make more money. But just be honest about it.
Don't lie to your customer about doing "due diligence" on a plain-vanilla stock fund, when the only reason you're not allowing your customers to buy it is because you want to make more money.
This broker is proving exactly why I am in business...
I am beholden to only one person – you, my dear reader.
The only way I get paid is through your subscription fees. If I don't do a good job for you, then I lose your subscription. The relationship is simple and clear.
My recommendations aren't restricted based on what some brokerage firm says. I don't have the temptation to choose a higher-commission product to recommend to you, because I don't earn any fees. I don't have to sell "in house" products, because there is no "house." In short, I am not beholden to my brokerage firm first, and my client second.
It's just you and me... I simply give you my best advice, treating you how I would want to be treated if our roles were reversed. If you like my work, then you renew your subscription. If you don't like it, then you walk away. Simple.
I have done this... for decades now. By putting readers first, our business has grown to what is probably the largest of its kind in the world.
So hopefully you can see why it makes me so mad when a brokerage firm stretches the truth to a customer and then blames me. It's wrong on so many levels.
Look, most brokerage firms will let you buy boring stock ETFs like the one I recommended.
If your brokerage firm won't let you buy a boring stock ETF, then you should consider that a red flag... And find another broker ASAP.
Good investing,

Further Reading:

"You are the owner of your wealth, not your broker," Mark Ford writes. "If you aren't the boss of that relationship, you are in trouble." Learn what qualities you should look for in a broker, and when to walk away, in this timeless essay: Why I Wasn't 'Loyal' to My Broker.
"ETFs give us all of the benefits of mutual funds... But without the enormous cost," writes Steve. Over time, high mutual-fund fees could cost you a fortune. Find out how low-cost ETFs can save you money today right here: This Essay Could Literally Save You Millions of Dollars.

Market Notes


Today's chart highlights the risk of having all your eggs in one basket...
When a company is heavily dependent on one customer for its sales, it can face challenges that more diversified companies won't. For example, take doing business with Wal-Mart (WMT)... Wal-Mart is known for squeezing lower prices out of its vendors. The vendors have no choice but to comply because Wal-Mart's orders are massive.
But a bigger problem is if a "Wal-Mart" stops ordering from a vendor entirely... That business would be in big trouble. Today, we can see this idea in action with shares of mattress and bedding maker Tempur Sealy International (TPX).
Last week, Mattress Firm – which represents approximately 25% of TPX's sales – terminated its relationship with the company. As you can see, TPX shares plunged nearly 30% yesterday to multi-year lows. If you want to invest successfully, avoid businesses that make their profits from only a few customers... It may save you a fortune.

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