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Max's Investment World Stock Market Challenge

Full-Service Brokers a Misundersood Lot

Stock brokers who work at places like Merrill Lynch and PaineWebber are a misunderstood lot. Some experienced individual investors say that their commissions are too expensive or that brokers are at best order takers and at worst, thieves who frequently buy and sell customers securities to make a quick buck--a practice known as churning.

It's true that there are some lazy brokers, or brokers who churn accounts or put their clients in the wrong investments. But there are plenty of honest, experienced brokers as well who do a great job for their clients. The real problem is lofty expectations on the part of clients.

Like doctors' patients, clients of brokers expect way too much. They expect brokers to divine the future direction of stock prices, know why stocks are going up and down every minute, take them to fancy restaurants, and get their kids a summer job on Wall Street. Mostly, however, clients expect their stock brokers to magically make them a pile of dough. That's just not going to happen by itself.

The broker takes her cue from the client. And just like a psychiatrist, a good broker tries to educate a client so that she can understand the risks and rewards of the investments she is getting into. The broker is also responsible for disseminating research undertaken by the securities firm she works for and making it relevant and understandable for the client.

It's quite possible that an individual who invests for herself via a discount broker or directly in mutual funds can do just as well or better than someone who has a full-service broker. Indeed, by eliminating hefty commissions, a solo investor has a head start. But the solo investor must work much harder at understanding investments and interpreting news about them. A solo investor can't turn for help and get a fairly immediate answer. A solo investor must, instead, hold her own hand as, at times, stock prices tumble hundreds of points.

Bottom line: Plenty of people know that they should be invested in stocks or stock mutual funds but are too nervous because they don't know enough about the risks they pose and how they can be diversified. Brokers can and do help them to understand, and by doing so, help them accumulate respectable nest eggs.

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