Page 75 - Rich Dad's Increase Your Financial IQ: Get Smarter with Your Money

teachers who teach our courses are investors who practice what they teach.
The Rich Dad Company values financial education because it was the glue

for Kim and me to have a strong relationship with our brokers, Tom and
John. It was the personal commitment to long-term financial education that
allowed all four of us to grow very rich together.
Today, I have stock and real estate brokers calling constantly. All of

them claim to have a hot deal that will make me rich. In most cases, all they
are interested in is a commission so they can put food on their table . . . not
my table. Good brokers want to put food on both tables.
Again, financial IQ #2 is measured in percentages. Brokers often earn

their income in percentages. For example, if I buy a $1 million property,
brokers may earn 6 percent of the sale, or $60,000. If that property makes
me 10 percent cash on cash return every year, then the broker’s fee has been
well earned, since I only pay that commission once.

Conversely, if I buy and sell (flip a property or day trade a stock) I pay a
commission going in and coming out. This is often called a “round trip” or
“slippage.” In real estate, a round trip for a flipper may eat 12 percent of the
profits, as well as trigger higher taxes. That is not financially intelligent.

TRADERS VS. INVESTORS

People who go “in and out” are traders, not investors. Not only do traders
pay higher commissions to brokers, the trader pays a higher percentage in

taxes, a.k.a. short-term capital gains, for buying and selling. This means the
tax department bureaucrats do not consider people who buy and sell for
capital gains investors. They consider them professional traders and may
even add a self-employment tax onto their earnings. Brokers and

bureaucrats win, and traders lose in these types of transactions. Financially
intelligent investors know how to minimize predatory transaction fees and
taxes by investing wisely and utilizing good brokers.

CHURNING

Years ago, a friend’s mother had her account “churned” by her friendly
stockbroker. Churning is when the broker is busy buying and selling stocks

for the client. In the end, the broker gets the client’s money via
commissions, and the client’s portfolio is drained.