Trust but Verify: A guide to critical reading of brokerages

The Internet is awash with reviews, reports, and evaluations of online brokerages. For a relative novice conducting cursory research into this topic, it can get a little confusing.

For starters, many brokers invest heavily in marketing their own platforms. They do so by paying writers for positive reviews. This muddies the waters a little bit, given that professional writers and search engine optimization experts can create a skewed picture of the merits of an online broker. However, there is a myriad of verifiable, credible, and objective online resources that can be used to evaluate the quality of an online broker.

‘Should you trust the advice of financial blogs and magazines?’

In the words of erstwhile US president Ronald Reagan, trust but verify. In fact, these three words were so popular that Democratic president Barack Obama used them when referring to the Iran nuclear deal. It is incumbent upon traders and investors to evaluate multiple sources of information regarding the merits of a broker, and then putting that to the test. There are certain resources that should be avoided at all costs when evaluating the quality, credibility and merits of an online brokerage. Foremost among them is any on-site review of the broker. If you go to any UK, Canadian, US, or European online brokerage, you will invariably see quotes from supposed clients who are absolutely delighted with the services provided by the broker. As a rule, you should ignore these.

Steps to Take to Separate Good Advice from Bad Advice

Financial magazines, business journals, and finance blogs provide information about the state of the financial markets, trading possibilities, and the purported expert opinions of writers and industry aficionados. The pedigree of the writer is paramount with these media sources. For starters, it is imperative to evaluate the credentials of the writer. Finance experts are typically well endowed with a list of verifiable credentials in the form of published articles on ranking websites, periodicals, newspapers and finance journals. The best litmus test for evaluating the authenticity and viability of financial advice is a quick search on Yahoo, Bing, Google, etc. An expert in financial matters, investments, and trading activity is associated with certain characteristics, including the following:

  • Well-constructed investment advice. This advice is predicated on sound economic theory, and has a unique slant on it that makes it actionable.
  • The nature of the content itself should be grammatically sound. This includes specific investment terms and conditions that only active day traders, options brokers, and investment analysts would understand.
  • The investment advice should never push traders to buy a specific ETF, stock, commodity, currency pair, or index. Rather, it should balance the pros and cons of the financial instrument with the opinion and forecast of the author. To this end, the financial blog, website or journal should have a disclaimer clearly posted that the writer has no financial interest in the underlying instruments.
  • Rather than accepting the advice of the financial trading expert at face value, read on and see if the blog, finance website, or journal has a comments section. Critically read the comments posted by other people like yourself. Commentary often adds greater insights to the article than the writer’s sentiments alone.
  • How is the finance author generating his or her income? This is an important question. If they are getting compensated for selling you stocks, then they are bound to promote certain stocks. Conversely, if they are simply paid as expert consultants to give their opinion, it may be worthwhile reading their commentary.
  • Experts who promote complicated trading tactics, strategies, and financial advice should be avoided. These are often likely to be convoluted techniques geared towards getting you to buy into a trading system or strategy.
  • Another way to determine whether the advice you’re getting is hocus-pocus or not is the promise of guaranteed returns. Note: No legitimate financial advisor, trading expert or professional investment consultant will ever promise you guaranteed returns on any instrument. There simply is no way to peer into a crystal ball and say with 100% certainty what returns you will be generating on your investment.

There are hundreds of other time-tested techniques and methods to ascertain whether you are being fed gobbledygook in what you’re reading or not. Of course, it is better to go with credible advice sources such as the Wall Street Journal, The Economist, The Business Times, and highly ranked financial blogs and journals. Much the same is true of respected financial authors who can easily be evaluated based on the number of followers on social media, their ranking in search engine listings etc.

Financial writers should always encourage feedback from their readers. For example, the conclusion of an article should ask readers what their experience has been with such and such a company, a stock, etc. The feedback is critical to gauging the efficacy of the advice on offer A final point is worthy of consideration: Read multiple sources to gain the broadest possible perspective on financial matters. There is no Holy Grail when it comes to sage advice. Rather, it’s an eclectic combination of sources that should be assessed based on merit.

What Good Advice Looks Like

A good example of a financial article that allows the reader to think for himself/herself about the merits of the advice on offer is the one by Young and Thrifty which offers a comparison of online brokers in Canada. It is futile to review individual brokers without comparing them to others in the industry. Canadian discount brokerage comparisons take multiple factors into consideration such as the annual RRSP fees, the annual TFSA fees, the annual RESP fees, annual nonregistered account fees, free ETF transactions available, basic trading fees, possible ECN fees, account minimums, cell phone friendly transactions, online live chat functionality, and transfer fees applicable to the brokerage.

Canadian brokerage aggregators perform all these functions for you. Provided you’re working with a reputable source of information (based on the points above), you can rest assured that the content is accurate and up-to-date. In Canada for example, Questrade ranks highly in terms of annual fees, annual TFSA fees, nonregistered account fees, and annual RESP fees. It is imperative to evaluate multiple components of an online brokerage to classify it as a discount brokerage. Remember to avoid the hoopla and marketing gobbledygook – factual data is what makes the difference between a worthwhile brokerage and the rest.