You might've forgotten doing this... But I can almost guarantee you did. At some point, you filled out a "risk tolerance" questionnaire for your broker...
Your Broker's 'Get Out of Jail Free' Card
By Marc Gerstein, director of research, Chaikin Analytics
You might've forgotten doing this... But I can almost guarantee you did.
At some point, you filled out a "risk tolerance" questionnaire for your broker...
These days, every broker has one of these questionnaires. They ask questions like, "Do you plan to keep pace with the stock market or would you like your assets to grow faster than the market?" And they're often pitched as a way to assess your current investing goals.
But the thing is... the risk-tolerance questionnaire isn't really for you. It's for your broker.
Are you getting crushed in the markets and want to blame your broker?
Well, your broker has the risk-tolerance questionnaire that you filled out. It aims to cover their butt in up-and-down markets like the one we're in today...
You almost certainly answered one of the questions with a growth-oriented response. So now, your broker has a "get out of jail free" card. And your losses are your problem alone.
In short, your broker simply needs to meet the so-called "suitability standard" for your goals.
We'll unpack what that means in today's essay. And we'll share an example of how one investor lost hundreds of thousands of dollars while her broker earned a 5% commission...
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Let's start with the Financial Industry Regulatory Authority's definition of "risk"...
"Risk is any uncertainty with respect to your investments that has the potential to negatively affect your financial welfare. For example, your investment value might rise or fall because of market conditions (market risk)."
This definition might seem a little vague and broad. That's intentional... The world of risks facing investors is broad. And it can be hard to define as well.
Worse still, your broker has the "get out of jail free" card. And you better believe they'll use it to their advantage...
You see, the risk-tolerance questionnaire makes it much easier for your broker to follow the "suitability standard." Their investment decisions simply need to have the potential to benefit you.
In the end, thanks to your responses to the risk-tolerance questionnaire, nearly anything the broker advises you to do may pass the suitability test. That's true even if the broker earns a commission off the investment they recommend.
Susan Bernardo is just one example...
Several years ago, her broker advised dumping relatively safe bonds. He believed Susan could earn more income through other investments. And she desperately needed income...
Susan needed to support her young son after her husband died in a tragic accident.
Thanks to the broker's advice, Susan ended up selling nearly $400,000 worth of her portfolio.
But unfortunately, roughly six years after her broker said to sell the bonds, the value of her portfolio had been cut in half. And her much-needed income stream had mostly vanished.
Despite all that... Susan's broker earned a 5% commission as she liquidated the portfolio.
In the end, Susan filed a claim against the broker with the help of a new investment adviser. But cases like hers are a longshot for any sort of reparations...
Susan said the original broker didn't tell her that the new investments were so risky. However, I'm sure the broker is ready with his "get out of jail free" card...
You see, Susan almost certainly filled out a risk-tolerance questionnaire. And she likely indicated the desire to earn more income in her response to at least one of the questions.
At least in the eyes of the law, that move would make the broker's investment choices "suitable" for her. That's true even if these choices were incredibly risky – and ultimately cost her hundreds of thousands of dollars.
Folks, the takeaway is simple...
You need to do your own research. Don't rely on others to act in your best interest. When it comes to the people selling you these ideas... they likely have a "get out of jail free" card.
Good investing,
Marc Gerstein
Market View
Major Indexes and Notable Sectors
# Hld: Bullish Neutral Bearish
Dow 30
+0.35%
5
19
6
S&P 500
+0.64%
67
326
103
Nasdaq
+1.67%
7
71
21
Small Caps
+1.09%
179
1177
530
Bonds
-1.73%
Communication Services
+2.76%
1
11
10
— According to the Chaikin Power Bar, Small Cap stocks are more Bearish than Large Cap stocks. Major indexes are mixed.
* * * *
Top Movers
Gainers
EPAM
+8.87%
ALGN
+6.54%
KMX
+6.25%
OXY
+5.83%
MRNA
+5.71%
Losers
GPN
-9.21%
IRM
-5.64%
MCO
-4.85%
PLD
-4.47%
VRTX
-4.12%
* * * *
Earnings Report
Reporting Today
Rating
Before Open
After Close
TAP, LDOS, INCY
AIZ, MPC, CMS, CNP, EIX
HWM, HSIC, AME, IT, HLT, FIS, ETN, MLM, PEG, SEE, CTLT, BIIB, BEN
Over the past 6 months, the Oil & Gas Equipment Services subsector (XES) has outperformed the S&P 500 by +32.97%. Its Power Bar ratio, which measures future potential, is Very Strong, with more Bullish than Bearish stocks. It is currently ranked #1 of 21 subsectors.
Top Stocks
LBRT
Liberty Energy Inc.
PUMP
ProPetro Holding Cor
NEX
NexTier Oilfield Sol
* * * *
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This work is based on SEC filings, current events, interviews, corporate press releases, and what we've learned as financial journalists. It may contain errors, and you shouldn't make any investment decision based solely on what you read here. It's your money and your responsibility.
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