License to Steal

January 2015

Stockbrokers commonly joke with each other that using mark-ups and markdowns is like having a license to steal. After taking your order or solicitation, your broker makes a conscious decision to either execute your trade on an agency basis, which shows his commission directly on your trade confirmation, or execute the trade on a riskless principal transaction basis. The latter allows your broker to charge a mark-up when buying stock, or a markdown when selling stock, and effectively hide the amount of profit he earns on the trade. For example, say you purchase 10,000 shares of stock with a mark-up of .70. When you look at your trade confirmation, the commission column is blank or shows $0.00 charged. The mark-up camouflages the true amount your broker is charging you for the transaction, which in this instance is a commission equivalent of $7,000. Stockbrokers do not inform their clients of this practice for obvious reasons. Use of such tactics is far too common within transactional firms, where broker abuse seems to run rampant. Cold Spring Advisory Group strongly believes that these tactics ensure that no investor will come out a winner. Mathematically, how could an investor come out ahead when the broker is charging a 2% - 5% mark-up / markdown on a mere twenty transactions per year? The investor would need to make 40% - 100% on his dollar just to break even. Our firm is commonly reviewing cases where cost maintenance is running at 30% - 125% for these investors, which puts them in a “no-win” situation. Today’s investors assume that safeguards are in place to protect them and their investments from predatory and unethical practices. When investors lose money in the stock market, they generally suspect it is a result of typical market dynamics, poor investment choices or plain bad luck. They look at their trade confirmations and see the number of shares purchased or sold, the price, and their commission fees. They see nothing to indicate their account is being mismanaged or that they are a victim of broker abuse. So investors, carefully review your trade confirms to see if your broker is using these tactics with you. To learn more or discover if you have been or are currently a victim of broker mismanagement or abuse, please call Cold Spring Advisory Group for a free consultation at (866) 407-1106, or visit our website at