Dubious Brokers
Dubious brokers and share salespeople operate today in UK authorized firms. Some are half-commission brokers, attached to stockbroking firms that pay them a percentage of commission on every trade and keep the rest of it. Others are salaried. The firms may have a history of surviving regulatory action and fines. They may sell speculative shares to private investors, but, unlike some continental bucket shops, will not usually steal money outright.

Some of the dubious individuals will have been trained at licensed dealers in securities authorized by the Department of Trade and Industry, a type of firm which was phased out with the implementation of the Financial Services Act, 1986. They will have been taught never to say that a stock will, or is certain to, rise in value. Instead, they were required to say that the stock should, or is likely to, rise in value. This way, victims of their sales pitch found it harder to accuse them of having given misleading information, particularly if the firm taped client calls.

The dubious broker presents news and research selectively to back his or her sales case. If a stock has performed poorly and has a low P/E ratio (see Day 7), the broker will say that it is undervalued, and cite studies showing that companies with low P/E ratios have historically outperformed the market. He or she will not point out that a low P/E ratio can warn of poor prospects.

Conversely, if the broker is selling a growth stock with a high P/E ratio, he or she will stress the benefits of relative strength (against the market index) and gloss over the likely overvaluation against fundamentals.

The client makes the investment decision more on the broker’s telephone manner and tone of voice than on the literal meaning of his or her words. On closing the sale, the broker may cover himself or herself (perhaps for the benefit of the tape) by saying something like: ‘Of course, I can’t make any guarantees about any stock – you understand that?’ and pause for the client’s consent, before continuing with: ‘With that proviso, I have great hopes for this one. . .’

Dubious brokers cannot always answer simple questions on the telephone and may cover up. The broker may say something like: ‘Hang on please, I’ve just got a call coming in from the States’ and will put the client on hold while he or she checks the query with somebody more knowledgeable. The broker will pick up the telephone conversation again with: ‘Sorry about that. What was your question?’ The client will repeat it, and the broker will provide the answer as if spontaneously.

Another tactic is to evade the question altogether. If a client asks why corporate earnings fell, the broker may parry with: ‘That’s unimportant for the company at this stage. What counts is revenue.’ The dubious advisory broker prefers you not to sell, unless you are simultaneously reinvesting the money with him. I know of one broker who responds to client sell requests with: ‘You must be out of your mind. You should be buying more.’ The broker may say: ‘Don’t sell that one’, implying that he or she knows of major developments within the company, but cannot reveal them.

If you prove insistent on selling, the shyster may ask you to wait for just another couple of weeks – during which, he or she implies, the company’s fortunes may take a turn for the better: ‘If you then still wish to sell, go ahead.’ If you agree, the broker knows that there is a good chance that by then you will have more pressing priorities than selling the stock. As an added disincentive, the broker may put the onus on you to ring up about selling the stock. If you call, the broker may be unavailable.

The dubious salespeople will churn your portfolio, which is to trade with the sole aim of generating commission. Churning is not allowed, but it goes on and it cannot always be proved. The broker manipulates the private investor into making what he or she thinks is a personal decision to sell part of the portfolio and use the proceeds to buy new shares. The sales pitch will be something like: ‘This small high-tech stock has never been at such a low price. That’s why a lot of City professionals are quietly buying it up. Of course I couldn’t recommend that you sell your blue-chip shares to get involved in what is technically a speculative investment. I know what I would do in your shoes but you must make your own decision.’

On such prompting, 8 clients out of 10 will sell good stocks to reinvest in speculative rubbish. Just before executing the trade, the broker will reiterate, for the benefit of the tape, that the decision is the client’s and that there is a risk involved.

If you bought shares in a high-tech company, the broker will later suggest that its technology has become outdated, and will prompt you to sell the stock and reinvest elsewhere. You may be advised to sell your shares in a wire-line telephone company and reinvest in a cable technology company, then to jump ship for fibre optics. There is always a newer technology on the horizon.