Clark Howard's Tips

Avoid the full-commission stock broker trap

September 19, 2007

The stock brokerage industry is divided into two camps: There are the brokers who work on a full commission from the investments they sell you, and those that get paid based on the financial advice they give you.

Meanwhile, consumer protection in the field is very weak. The industry has a mentality that brokers are salespeople who shouldn't have to follow any business code of ethics. It's as if the majority of the industry doesn't really care about the financial interests of its clients.

CLARK'S TIP TOPICS Consumer Tips Managing Money Banks & Credit Cards Technology Health & Healthcare Car Costs Homes Phones & Utilities Small Business Travel & Leisure Find more consumer advice in Clark Howard's book, "Get Clark Smart"

In fact, the industry even conned the federal government into passing a law that says brokers aren't liable for bringing you to financial ruin so long as they presented you with "suitable" investment options.

If you sign up with a stock broker, you actually waive your right to take them to court if they cheat you. You have to sign a form that forces you to go through company-run arbitration if there's a dispute. That makes it nearly impossible to get back your lost money!

A study showed that you have a one in ten chance of winning in arbitration against stock brokers. It's a real kangaroo court scenario, according to Clark.

Now, Clark has no problem with arbitration if it's mutually agreed upon by both parties. But this kind is crammed down your throat.

Sure there are good brokers out there, but many others are not ethical. Clark's advice is that you never go to a full-commission stock broker. Only use brokers who get paid for their advice, not those who earn a commission from the investments they sell you.

More Clark Howard Money Management Tips Beware of impostor money market fund investments  Investigate charities thoroughly before giving them money  Clark's 529 Plan Guide has been updated!  Mandatory private accounts may solve SS dilemma  Free budgeting tools online!  Avoid the full-commission stock broker trap  Avoid the full-commission stock broker trap  Scams heat up when economy cools down  The dangers of purchasing employer stock  Free budgeting tools online!  Full list