A stockbrokers life

Hugh F. Doherty, DDS, CFP

A former broker recently revealed to me how he was trained and under what conditions brokers typically work. Here are some eye-openers.

It was hard to land a job as a broker, since his educational background (B.S. in business, M.B.A.) and training counted far less than his lack of prior sales experience. His training included a course actually called "Gorilla Cold Calling," which covered how to call and sell to as many prospects (particularly doctors) as possible. The rule of thumb was that out of 100 calls per day, 10 people might listen to the pitch and two of them would buy, meaning two new clients per day. Prospects were found by looking in the Yellow Pages for doctors, lawyers, and the like.

Every morning there was a call from the home office on Wall Street, listing stocks upgraded or downgraded by analysts. These represented reasons to call clients and urge them to buy or sell (generating commissions). The brokers were updated weekly on new investments to push, such as complicated options strategies or limited partnerships (investments that should be avoided like the plague) that could be pitched as tax shelters. They were also given lists of stocks that the firm held in inventory and needed to get rid of. These were to be aggressively sold to clients, commission-free. The former broker notes that, since these stocks were so unappealing to most of the market, getting them for no commission was hardly a bargain. Calls were often made during dinner hours, and clients were urged to decide immediately. The pitch was: "Commission-free if you buy tonight!"

This is just one broker`s experience. But from what I have heard, it is a fairly common one. It`s true that some brokers are good people who do well for their clients. But sadly, many are simply salespeople, ringing up commissions in order to get ahead. I think this represents an unacceptable conflict of interest. "Churn to Earn" is their battle cry. Financial professionals should be compensated on how well they manage your money. After you read something like the above, it should motivate all doctors and spouses that it is a must that they educate themselves on how, why, and where they are going to invest their hard-earned money. Don`t be sold ... don`t buy until you have educated yourself about what you are purchasing. It is a must that you read Baron`s, Investor`s Business Daily, Wall Street Journal, Asset Allocation by Gibson, etc.

The IRS can be a bully

Don`t let the IRS bully you over the "cash" method vs. the "accrual" method. Practices using the cash method of accounting are the latest IRS whipping boys. Across the country, some doctors are being forced to switch to the more expensive accrual method and pay a fortune in back taxes, interest, and penalties. Worse, the IRS generally requires that the change be applied to earlier years, resulting in an even bigger tax hit. But you can protect your right to use the cash method. There are even techniques you can use when filing a tax return to help prevent a related audit.

It is more beneficial for practices to use cash-method accounting because you only record income as you take it in. In contrast, the accrual method forces you to pay taxes on income when you earn it but before you receive it. The IRS challenges the cash method precisely because it can result in smaller tax bills. The accrual accounting method is required for businesses that maintain inventories, such as retail operations. The IRS mistakenly believes that dental practices carry inventories.

Short-sale strategy

Investors use short sales to profit from falling stock prices. Typically, an investor first sells stock borrowed from a brokerage firm. If the price drops, he repurchases the stock, a move known as a short cover, returning the shares to the brokerage (plus interest) and pocketing the difference. Example: XYZ stock trades at $10 per share. A short-seller borrows and sells 100 shares, netting $1,000. XYZ stock price falls to $5; the short-seller now buys 100 shares for $500, returns the shares to the broker (plus interest and commission) and walks away with a profit of about $500. If, however, XYZ shares jump to $15, the buy-back cost jumps to $1,500. Before interest and fees, the investor loses $500.

Hugh F. Doherty, DDS, CFP, is a certified financial planner, national lecturer, financial advisor to the health-care profession, and CEO of Doctor`s Financial Network. Dr. Doherty is also director of The Personal & Practice Financial "Boot Camp." For further information on the "Boot Camp," lectures, consultations, or study club workshops, call (800) 544-9653 or visit www.dr.hughdoherty.com.