Robert J Samples wrote:
During my tenure as a broker with different brokerage firms, there were several different brokers that for one reason or another that caused their termination. They were doing dishonest acts and were caught. Usually their clients were made whole when the deeds were recognized, and the firm could identify the amount of damages done.
However, there are Catch 22 schemes perpetrated by the firm that go uncorrected and even promoted because it was profitable for the firm and allowed them to continue to benefit. That was in the manner they handle new stocks issued.
I will try to explain how this unfolded in the case of a new stock being issued. Because the firm could benefit from the game as far as I can determine it still exists. All the major brokerage firms hotly compete for gaining the benefit of a new company’s stock to be issued to customers on the market. There is naturally some high fever surrounding this possibility and expectation that the new issue will increase rapidly in value, so a high number of clients are anxious to acquire shares.
Pending its new issue there are what is called, “indications of interest” when a new issue is pending and a brokerage firm will be bringing it to market. Each different office of the issuing firm will have a broker designated to handle a list of those clients who are willing to have their name on this list to buy shares. There will just a little information leaked to create interest.
However, since the firm anticipates the interest and excitement of this possibly profitable event, they also will offer to mutual fund companies this same “indication of interest” opportunity as a source of raising their cash flow, but without the restrictions that are placed on a retail brokerage customer.
All retail brokerage customers are bound by a much tighter restriction, first in that they cannot purchase more than a limited number of shares, perhaps 100 shares, and that if they are permitted to purchase these shares, they must hold them for at least one year. But the mutual fund companies purchase shares, they can place orders of unlimited size and usually they are permitted to sell them anytime and sell them quickly for a fast profit.
This is discriminatory and should not be permitted, but it goes on because of the increased cash flow for both parties. So, it is a case of putting “lipstick on the pig!” If retail clients can purchase unlimited number of shares, the obvious thing is to avoid any purchase. If the stock is really a desirable stock and there is a good chance of it going up, retail customers are not allowed to have any. All the time it usually difficult to know for sure if the stock is really a suitable investment, or a pig with lipstick!
The most critical factor is can you trust your broker. If your broker is trustworthy, he or she will look out for your interests in all situations. However, you are obviously going to have to allow them to earn their living, either through commissions or percentages of income for management of your accounts. Just Sayin…RJS
During my tenure as a broker with different broker... (
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Better make sure they are a fiduciary. (SP) Mike