Stock Broker? Read This!

Have you watch the movie ‘The Wolf of Wallstreet’? The film tells the story of career of Jordan Belfort, a stockbroker in United States (Wall Street) in the 90’s. Belfort was very good in convincing customers to buy and sell certain stocks, which he obtained trading fee from it. Because of the expertise, he was successfully established his own broker company, Stratton Oakmont, and became very wealthy before the age of 30. But the ending is quite ironic: Belfort got arrested for insider trading, which caused losses of up to tens of millions of dollars of his customers.

Belfort was not a stock investor or trader, he was a stockbroker (also called equity sales). He obtain his income from the activity of stock trading undertaken by his clients. And with a little trick, he can make additional profits from the losses suffered by its clients, by way of ‘cooking up’ penny stocks and then encouraging the investors to buy it at high prices. In simple terms, Belfort was a stock maker.

But it (the loss suffered by the customer) might not be entirely Belfort’s fault. In the movie, when he was hired at a broker company for the first time at the age of 22 years, Belfort (portrayed by Leonardo diCaprio) is invited to lunch by his superior, and here’s their conversation:

Belfort: 'It is an honor for me to work in your company Sir. Here, I meet with many rich and important clients...'

Superior: '(Interrupt) F**k the client. Your job is to make profits for company.'

Belfort: 'Well, but it can be done while helping customers to make gain from the stocks, right?'

Superior: '(Shook his head) When a customer sell his shares and make a profit, then do not let him withdraw the money, but encourages him to buy another stock again, and again.. He will probably make a profit or suffer a loss, even if he make a profit, then it was only on paper. But the most importantly, we will gain a trading fee, in cash!'

The scene reminds me of one day in 2011 where I was offered to work as a stockbroker in a brokerage firm. When I met the person who will be my boss (if I were working for the company), he says, 'Your job is to encourage customers to trade, trade, and trade again, because our revenue is derived from it'. At the time, I have already become an investor, so thinking to myself: 'So my job as a broker, instead of helping the clients to make profits from their investment, I just have to encourage them to spend money by buying and selling shares frequently, don’t care whether he making profit or loss?'

Two seconds later, I decided not to working there.

Unfortunately, when I met with some acquaintances from other brokerage firms, it turns out that the they have the same method of works: Encourage the clients to buy and sell the stocks as often as possible. Of course, these brokers do not say like this to their clients, 'Sir, please trade your stock so I will get commission!', but,'Sir, I found a good stock, with good chart that offers upside potential, with limited risk! Want to buy it or not? How many? Well, but you don’t have enough cash, so will you sell some of your holdings?' Yep! A broker is asked (by the brokerage firm where he worked) to give stock recommendations, every day if, to his customers, with the expectation that the clients would sell shares which he held previously, then use the money to buy the recommended stocks. Or in other words, make trades. In this way, the customer will not feel that he is actually doing a 'charity' for the brokerage firm. Instead, he will feel happy for obtaining free information/stock recommendations every day, especially if the stocks went up.

So when an investor has become addicted to stock trading, moreover he doing it every day, then that’s when his broker may be said to have made ​​a big success.

However, the way of work of brokers as explained above is understandable. Any investors, including Warren Buffett, could suffer losses at any time. So if a broker’s income come from gain or profit sharing from his customers (so that he will help his customers to make profits as much as possible), then what if the client still suffer a loss anyway? Therefore, the brokerage firms created a system where they can earn incomes no matter if their customers made a profit or suffer a loss, ie, by applying the trading fee. And it is a legal income, because every 'intermediary' was indeed entitled to a commission for brokerage services that they provide. In addition, when an investor suffers a loss, then it is not broker’s fault, because a broker will never deliberately plunges his customers to suffer a loss (what's in it? No matter a customer made a profit or loss, his broker will only received trading fee), except if he became a stock maker like Jordan Belfort was.

But when a broker stuck on the phrase, 'I don’t give a f**k if my clients made gain or loss, because all is important is my trading fee!', then, admit it, it is not a good way of business. A friend of mine who is a fund manager at Pension Fund of Angkasa Pura (the state airport management company) once say this, 'Although the decision to buy or sell remains in the hands of customers, but the broker should be able to be a fund manager for its customers, in terms of trying to make profits from the investments made. Part-time investors may be less concerned about whether their broker helped them or not, but for professional investors like us, we can distinguish which broker who only cares about the trading fee, and which broker who is really trying to help us. And of course, we prefer the latter.'

So as a broker, what should I do? Well, it is simple, namely: Instead of seeing your clients/customers as your cash cow, treat them as business partners who, like you, have the rights to receive benefit from the cooperation that made​​, in this case when they open an account in your brokerage company. You have to have the same vision with us, namely: To make profits from the investments, and not to tick tock the stocks without senses. When you provide a stock recommendation to us, then it must be a qualified one (not necessarily accurate, just make sense), and not an ‘empty’ recommendation just to encourage us to make trades.

And if you notice, it is not true that no matter if the customer receives gain or loss, then the brokers still get the trading fee. The truth is, if customers suffer a loss, then your trading fee would be smaller because the value of the client’s funds to buy and sell stocks will be reduced, right? If the customer's loss continues, then after a long time he will run out of money, and can not trade anymore. But if the customer make profits, then your fee will also increases because now the customer will use a bigger funds to buy and sell stocks, and he also likely to deposit more funds.

Another myth that may be trusted by the majority of equity sales is that the long-term investor does not provide any benefits for them, because they’re prefer to hold the stocks without doing any trading transactions. In fact, even Warren Buffett since then until now, he always buy particular stocks every year (except in 1999 when the dot com bubble occured), and he occasionally sell some of his holdings. Meaning? He always generate commissions for his brokers! Think about it, when Buffett bought IBM at a price of approximately US$ 10 billion, then how much the fee??? Take 0.07% only (this is the average net commission for brokers in Indonesia, after the cuts for brokerage firm, self regulatory organizations-stock exchange related, and taxes), then it equals to US$ 7 million! I mean, as a broker, you better manage large customers that only need to push the buy button once to generate a large commission, rather than small clients that should be encouraged to do the transactions every day so that your commission was big enough.

However, you will not be able to handle a large client unless you have a reputation that you are really helping the customers to make a profit, or if you successfully help your clients who was small once to be large by himself. I know some successful brokers that generate tens of thousand US Dollars every month, and it is because they hold large clients, such as institutional investors, or full time individual investors. Those big clients are willing to be held by them, because these brokers were the stock experts (this may need to be underlined, because I once met with broker who do not even know where to look for the company's financial statements!), very experienced, capable of helping clients to generate real profits, and most importantly: Able to be a friend to the clients! Because, sometimes investors do not need stock recommendations, but simply a friend who could provide friendly advice. A good broker must be able to provide counseling for his clients, where he can calming them down when the stock market is down, and vice versa, reminding them to be realistic and not greedy when the market was bullish.

An example of successful broker for implementing the method of 'become friends' with his clients, is Chris Gardner. In the movie 'Pursuit of Happyness', Gardner, portrayed by Will Smith, deliberately came to the house of a large fund manager, to offer him to open an account at Dean Witter Reynolds, the brokerage firm where Gardner works for (while his fellow brokers only contacting potential clients through the phone). Gardner also spend his valuable time to watch a base ball game with the fund manager and his son, even though he actually does not like the base ball. Throughout the game, Gardner only talk about the game itself, including chatting with the child, rather than speak about the stock. The result, he eventually had a great success, where a few years later he was able to establish his own brokerage company.

There are only few brokers who can be a friend to his clients, and some of them is not a good friend (read: not quite understand about the stock, so that clients could not ask for any advice). A good friend of mine, Mr. Gunawan, owner of Anggun Trader blog, he is a full time stock trader that manage a sizable fund, and he once says, 'I do not prefer to open an account in large brokerage firm, because I found that the director was difficult to meet and arrogant, while I was only given a young broker who is ready to assist me at any time, but too bad he did not understand anything. While in a small brokerage, the directors are usually more friendly and not difficult to be found or to lunch. And as a stock trader, that's all I need.'

I myself, when I opened an account at the brokerage for the first time, I had never pay attention to this matter. But now, I choose a brokerage not only because the system is good, the trading fee is cheap, or the like, but because the equity sales is a good friend of mine where I feel comfortable to discuss the stock investments with him, and he was always available whenever I need particular assistance. That's all!

So, let us trace the criteria again. To be a successful stock broker, you must: 1. Being a business partner who has the same vision with your clients, ie to make a profit and grow together, 2. Has a broad knowledge about the stock so that clients can consult, and 3. Being able to be a friend. Sound difficult? Well, not really, because we as investors also have the same difficulties for doing the analysis, manage portfolios, etc.. It is not easy for us to continue to make a profit, while at the same time keeping our sheet clean (read: avoid losses). In essence, all professions in the capital markets have their respective challenges, as well as other professions in the world, where we are required to work as it should, if we want to be great.

Hmm, I think it is enough. Anyone want to add?