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The Motley Fool: Beware of some brokers

The Motley Fool The Spokesman-Review

A former stockbroker once revealed to us how he was trained and under what conditions brokers sometimes work. Here are some eye-opening snippets.

“It was hard to land the job of broker, as his educational background (B.S. in business, M.B.A.) and training counted far less than his lack of prior sales experience.

“His on-the-job training included a course called “Gorilla Cold Calling,” which covered how to call and sell to as many prospects as possible. The rule of thumb was that out of 100 calls per day, 10 people might listen to the pitch, and two of them should buy, meaning two new clients per day. Prospects were found by looking in the phone book for doctors, lawyers, etc.

“Every morning there was a “squawk box” call from the home office on Wall Street, listing stocks upgraded or downgraded by analysts that day. These represented reasons to call clients and urge them to buy or sell (generating all-important commissions).

“The brokers were updated weekly on new investments to push, such as complicated options strategies or limited partnerships that could be pitched as tax shelters. They were also given lists of stocks that the firm held in inventory and needed to get rid of. These were to be aggressively sold to clients as “commission-free.” (Since these stocks were so unappealing to most of the market, getting them for no commission was hardly a bargain.)

“ Calls were often made during dinner hours, urging people to decide immediately. (“Commission-free if you buy tonight!”)

“Contests were even held, with prizes awarded to those who generated the most sales.

This is just one broker’s experience, but it’s not an uncommon one. It’s true that many brokers are good people who serve their clients well. But sadly, many others are simply salespeople, ringing up commissions in order to make more money. This sure seems like an unsavory conflict of interest. Financial professionals should be compensated on how well they manage your money, not how often they move it around.

Ask the Fool

Q: What other stock indexes exist, besides the Standard & Poor’s (S&P) 500? — L.W., Lexington, Ky.

A: Here are just a few, of many. The most famous index is the Dow Jones industrial average (“the Dow”), which includes 30 flagship American giants, such as ExxonMobil, General Electric, Citigroup and General Motors. The S&P 500 also focuses on large companies, including 500 of America’s leading companies. Its components account for more than 70 percent of the total market value of the U.S. stock market. These two indexes are viewed as bellwethers for the overall U.S. economy.

Then there’s the Russell 3000 index, which includes 3,000 of the largest U.S. companies based on market capitalization (current share price multiplied by number of shares outstanding). These 3,000 constitute about 98 percent of the U.S. market’s value. For a measure of small-cap companies, look to the Russell 2000. It’s composed of the 2,000 smallest companies in the Russell 3000. The Dow Jones Wilshire 5000 is just about the broadest index of American companies, including almost every publicly traded company. A broad international index is the Dow Jones Wilshire Global Total Market index, representing about 98 percent of the world’s stock market value.

Some other indexes are for international regions such as Latin America, Europe or Asia. Others address sectors such as utilities, semiconductors and the Internet. Learn more at indexfunds01.htm.

My dumbest investment

I haven’t been able to talk about this since it happened. In 2000 a friend urged me to invest in a company with an innovative laser to correct vision. He had just made $17 million on another laser company. I’d lost a lot investing with a big brokerage house, so I thought I would go it alone and try to get all my losses back with this one investment. I put $2.1 million on the stock at $11 per share. It was to get a critical FDA approval the following week. My friend loaded up on options and said we’d never have to work again. But the FDA approval didn’t arrive. My friend lost everything and had to sell his house and boat. I left the market and went back to what I know, which is real estate. I want to enter the market again, but I’m trying to educate myself first. In case you’re wondering, my friend now cooks at a bar and has never recovered. — R.K., Miami

The Fool Responds: Sticking to what you know is smart, as is widening your circle of competence by learning.

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