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Tuesday, February 22, 2011

The Broker Did What??????????????

The Smartest Investment Book You'll Ever Read: The Proven Way to Beat the 'Pros' and Take Control of Your Financial FutureDIY Investor is an unabashed fan of Dan Solin. I  just want that out front. In fact, when I detect a person is searching for a DIY investment philosophy or even when I feel they would benefit from considering a different approach to investing, I strongly recommend Solin's The Smartest Investment Book You'll Ever Read.  The book can be read in a weekend and presents the case for low-cost indexing. For those who don't like to read, DIY Investor directs them to Solin's talk on YouTube as part of Google's author series.

Solin stands out from the "how to invest" crowd because he is a securities arbitration lawyer. He has seen first hand the portfolios and lives destroyed by unscrupulous brokers.

One of the cases he has come across  is presented in this post from Arianna Capital Management. The Salomon Smith Barney broker took a conservative portfolio of muni bonds and used it as collateral to buy stock on margin. In the process, he lost over $2.0 million for the client. The interesting point is that, for an account that had an average value of $3.6 million, "...the brokerage firm gained $1.3 million (in commissions and margin interest) for “managing” this portfolio."  Although admittedly an extreme case, Solin points out this is how wealth is transferred from clients to brokers.

It is also well worth noting that the $1.3 million portfolio would have been worth in excess of $5 million, on a conservative estimate, if it had been managed with low-cost indexed funds.


  1. Good to know! I've heard of horror stories of brokers issuing a check written out to you when doing a transfer of a retirement account! Purely out of spite.

    There has to be consequences.

  2. I wonder if that broker is in jail. If he isn't, he probably should be.

  3. @MoneyCone can get nasty out there. Thanks for stopping by.

  4. @Andrew Good question. Usually they can't practice for a few years and then resurface to rip more people off. I agree - throw them in the slammer.

  5. That broker should definitely be in jail and the customer should be getting a healthy settlement from their lawsuit. Yet another reason not to give your broker full trading powers over your account.

  6. @The Grouch Imagine the people who get ripped off who never go to arbitration because they don't know they can!

  7. "He has seen first hand the portfolios and lives destroyed by unscrupulous brokers."

    Consequences? what happens usually with unscrupulous brokers? This is extremely sad, then one wonders why some people quit the market altogether!