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Beware The Stock Broker On Your Street

Your local shopping strip is probably full of coffee shops and overpriced homewares. I may be wearing rose-tinted glasses, but I recall a time when shopping strips were full of things we needed.

Not today. And that doesn’t look like changing anytime soon.

There may be a new entrant arriving at your local strip shortly. Something you’ve never seen before. And most likely something you don’t need either.

Recently, I received a mailing from a company in my inbox. A brochure explained that this company was ‘revolutionising’ the marketplace in Australia. Giving anyone the opportunity to become a ‘financial services broker’ via the franchise model.

The idea is simple: Anyone, no matter the background, can buy a franchise. And don’t worry about needing prior experience. The pamphlet states that the company will provide all ‘conduct training’.

The parent company also plans to provide the trading platform and the services — customer service, compliance and market support. The franchisee — that’s you — would then work with the support of a ‘big, international name’ behind it.

Sounds perfect, right?

Not quite…

The longer I thought about it, the more concerned I became.

For starters, why would a supposedly large ‘global financial company’ opt for a franchising model? I can’t think of any brokerage firm that has done this. All the regulation that goes into setting up a financial firm — and keeping it compliant — is a nightmare.

One of the problems with brokerage firms is that they make money regardless of whether the client does. Traditional brokerage firms have little interest in ‘sharing’ the profits with anyone. It’s almost as if the plan behind this model was a way to distribute costs onto franchisees.

Of more concern, however, is that brokerage firms offer incredibly risky derivative products. These aren’t something any novice should be using. Often an incredible amount of leverage is available. One wrong decision and you can quickly blow up the cash in your account faster than you can blink. And if you didn’t read the fine-print, you may find yourself on the hook for a lot more too.

Now let me be clear: I often use derivatives in my trading. They are very useful tools.

However, having used them for the better part of 11 years, when things go wrong, they really go wrong. They aren’t for market first-timers.

Questionable company actions aside, though, there is potentially an incredible upside to this.

This is a sign the Aussie market is about to undergo a major rally

Here’s why:

We’ve got low interest rates in Australia. And I reckon rates are going lower later this year too. Which means any cash sitting in the bank will continue to earn very little interest. Leaving investors searching for the increasingly-elusive yield elsewhere.

Why do I think rates are going lower?

Official Australian Bureau of Statistics data suggests unemployment is at 5.8%, with underemployment at 8.5%. Underemployment is where people have a job but want to work more hours.

In my view, however, Roy Morgan provides more accurate figures on unemployment than the ABS. They have unemployment at 9.8% and underemployment at 9.6%.

Meanwhile, annual wage growth is incredibly sluggish, sitting at 2%. Sure, the consumer price index (CPI) says inflation is low at 1.9%. But things like energy, housing costs, health insurance, and education costs are rising faster than wages.

House prices have risen so far that many people are being pushed to outer suburbs just to buy a house, raising their day-to-day costs to travel to work and school.

Basically, people are looking for ways to make a buck. For a long time, that’s involved taking out massive loans to buy investment properties. However, recent restrictions from the Australian Prudential Regulation Authority (APRA) have slowed the growth of investment loans.

Building wealth has become increasingly more difficult in the last few years.

Wages aren’t growing, and the number of hours people are working is less. And costs — on paper — are rising. Given these factors, I reckon we are about to see a lot more people pile into the Aussie stock market as a way to generate income and potentially grow their wealth.

The problem is that brokerage firms are preparing to ride this boom too. Taking some very unsuspecting customers along on a possibly disastrous ride. You’ve been warned.

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