The stock broker is usually the direct contact between the customer—the investor—and the company whose stock is being sold. The stock broker, or registered representative, is primarily a middleman and a salesperson who has passed a relatively uncomplicated examination that determines an ability to understand the fundamentals of the securities industry. The broker’s education beyond that need not be extensive, although some are highly sophisticated and skilled beyond their basic education.
Brokers work either on commissions or, in some cases, on a salary predicated upon a sales quota. It is perhaps this one fact that opens the spectrum of brokers’ range of skills, motivations, and performance. More than any other group of financial or analytical specialist on Wall Street, the broker is the hardest to categorize.
Some brokers are pure salespeople who want nothing to do with investor relations professionals; some cherish the relationship. Some brokers rely only companies recommended by their own in-house research staff (although this is now done under the new regulations); some have full leeway. Some are required by their firms to get permission to recommend stocks not followed by their firms; others—particularly those with large clienteles—have greater latitude. There are brokers who are opportunists, selling the latest stock idea and then moving on to the next one, and there are thoughtful and responsible brokers, genuinely interested in meeting the investment objectives of their customers.
For the responsible investor relations professional who chooses to include brokers in the mix, the broker to be sought after is the one who is thoughtful, knowledgeable, understands research and how to do it, has a large and well established following, and is interested in good relations with good investor relations people not for the free lunch, but for the useful information. The others should be dealt with cautiously. Traditionally, brokers rely upon their firm’s research department for basic information about a company and for the intensive analysis necessary to make a sound judgment about a security, to which they frequently add information from other sources. More and more brokers are doing their own research, and some are getting very good at it. There are a number of brokers’ organizations that serve as platforms for companies to make presentations, as analysts’ organizations once did exclusively. The quality of these organizations, though, varies substantially.
Naturally, with brokers as the focal point for the customer, it’s almost as important that brokers understand a corporation as do analysts, regardless of the degree of sophistication involved in that understanding. A knowledgeable and enthusiastic broker with a large following can place a substantial amount of stock, and some brokers form informal networks throughout the country with other brokers whose opinions they respect. Thus brokers are as important a target audience for corporate information as are analysts, if building a retail following is a goal.
Competition in the brokerage industry, enhanced by the elimination of fixed commissions, has also pervaded the discount stock on-line services, which have grown substantially through television and internet selling. These firms offer no-frills buying and selling stocks at low commission, but with no research advice. But now the competition in the discount industry is being fought by adding the special services, such as research, that they originally eschewed.
Naturally, with brokers as the focal point for the customer, it’s almost as important that brokers understand a corporation as do analysts, regardless of the degree of sophistication involved in that understanding. A knowledgeable and enthusiastic broker with a large following can place a substantial amount of stock, and some brokers form informal networks throughout the country with other brokers whose opinions they respect. Thus brokers are as important a target audience for corporate information as are analysts, if building a retail following is a goal.
More investors now make investment decisions based upon their own analysis. They then merely instruct the broker—usually a low fee, no-frills broker like Charles Schwab—to execute the order. They are more likely to come to the broker with the name of a stock they believe, for one reason or another, to be a good one. The low commission brokers usually don’t give investment advice, but simply execute orders. The full service broker may inquire of his or her research department or simply give their own reaction to the idea, based upon knowledge and feelings they’ve gleaned from their own research. They are less likely than their discount colleagues to just execute the order without some comment.
The broker’s job is the most precarious in the securities industry. Regardless of the general condition of the stock market, his or her job—and certainly income level—depends upon their customers’ buying and selling stock. If the market is down generally and if the small investor is not investing, the average broker obviously does very little business. If the stocks the broker recommends, based on whatever factors, do not go up, or the stocks they recommend to be sold do go up after the sale, they lose their customers. Since it’s relatively easy to become a broker, and extraordinarily difficult for a broker to make a good living in anything but a bull market, the turnover in brokers is overwhelming.
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