Should Your Brokerage Firm Be Your Bookie? A Financial Professional Weighs In

You have a good grip on your finances.

You have a joint account with your spouse at a brokerage firm, where you buy and sell securities. Each of you also has an IRA account at that brokerage firm to take advantage of the tax benefits available in such accounts.

You may even have a 529 college savings plan for each of your children (or your grandchildren) so you can take advantage of tax-free savings for education.

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These accounts are linked to a bank with which you have a long-term relationship.

In short, you have thoughtfully established a number of accounts at a central location to organize your finances, and that financial institution aggregates the amounts held in all of those accounts so you will receive the benefits of reduced costs available to preferred customers.

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Your broker suggested the possibility of opening a commodities trading account. After reading The Only Investment Guide You'll Ever Need by Andrew Tobias, you declined.

This is because Tobias notes on page six, "It is a fact that 90% or more of the people who play the commodities game get burned. I submit that you have now read all you ever need to read about commodities." I concur.

A little gambling here and there

You are also one of the organized people who has a budget that you periodically review. At the bottom of that budget, there is a line item for Entertainment with a subhead for Gambling.

The amount in that line item relates to your bets on football and other sports via online bookie sites, such as DraftKings or FanDuel.

The amount allocated to Gambling in your budget represents less than 1% of your net income, and you never continue gambling when that number, plus any winnings, reaches zero.

Most years, you show a modest gain; some years, you reach zero far earlier than you expect. Your spouse views this as a harmless byproduct of your love of sports.

Now your broker wants to become your bookie. Welcome to the world of "event contracts."

What are event contracts?

A simplified definition of an event contract: an up-or-down wager, or bet, on whether something will happen by a certain date.

Here is how that definition is worded at financial services firm Robinhood, which, along with Interactive Brokers, is at the forefront of urging clients to add event contracts to their portfolios:

"An event contract is a type of financial derivative that allows traders to speculate on the outcome of a specific event. These contracts are generally structured around yes-or-no outcomes and fluctuate in price based on the projected outcome of the event. Event contracts then pay out if the position held matches the correct outcome of the event; otherwise, they expire worthless."

So an event contract is, plain and simple, a yes-or-no bet that an event will — or will not — happen. A few more details are important. Each event contract is for $1. The price thus depends on the price someone is willing to pay to win a dollar with respect to the outcome chosen.

As circumstances change before the expiration of the contract, the price of the contract can change as well. Many contracts are closed out if you buy a contract that cancels out the first contract as events unfold.

Event contracts are a great business for the brokers

Now, then: In addition to being an organized individual who just happens to enjoy sports betting, you consider yourself a well-informed citizen with an astute sense of all things political. If you could, perhaps, bet on other things, like, say, the outcome of an election, there's an event contract that can scratch that itch.

Not that betting on elections is a new phenomenon. Bookie Jimmy the Greek claimed in his autobiography that he bet $10,000 at 17-1 odds that Truman would defeat Dewey in the 1948 election because American women did not trust a man with a mustache.

At any rate, Interactive Brokers has an event contract for the New York mayoral election: "Will Zohran Mamdani win the New York City general election for mayor in 2025?"

Recent reports indicate that prediction markets, another name for event contracts, are very lucrative for brokerage firms that have embraced them. Robinhood is on pace to have an annualized revenue of over $200 million for these contracts.

A large sum, to be sure, but equally intriguing is that Robinhood is on track to make that amount One. Penny. At. A. Time. That is what Robinhood charges for a $1 event contract.

What should you do?

First, if you are not the organized investor with an investment plan and a written budget, like the hero of our saga, resolve those items before placing a bet on anything, anywhere.

Second, what happens next depends entirely on you. But just as investing is a different activity from trading, investing is different from gambling.

Investing is a long-term activity designed to assure you of future financial comfort.

Gambling is an entertainment expense and has no business slopping into your investing regimen. If you are the organized and thoughtful individual you are (or want to be), you recognize the difference.

As noted above, brokerage firms have made millions of dollars, literally a penny at a time, in the event-contract business. It is in the interest of those firms to have you consolidate all of your transactions — investing, borrowing, banking and, yes, gambling — at that brokerage. Does that make sense? Perhaps.

But I would argue that you should separate the place you do your event-contract gambling from the place where you do your serious financial business.

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Why? Because if there is only one mouse click between your self-directed pension plan assets and your bet on who wins an election in Brazil, you could find your investments dissipated by what should never be more than your hobby.

(For a humorous take on how things can get out of hand when it is too easy to access assets that should remain untouched until you're ready for them, check out Garry Trudeau's Doonesbury collection But the Pension Plan Was Just Sitting There! It might be tough to find, since it was published in 1979, but resourceful readers can probably search out a copy online.)

It can be a slippery slope

"I'd never get in over my head," you say. While that may well be true, it is a slippery slope.

A study by the National Gambling Impact Study Commission found that the lifetime divorce rate for problem gamblers was 39.5% compared to 18.2% for the general population. The money you spend on event contracts should be money you would spend on lottery tickets, bingo or a night on the town.

Remember, our premise here is that you are an organized and thoughtful financial planner. You wouldn't liquidate your IRA account to see a Broadway play. For the same reason, you shouldn't even be tempted to liquidate financial assets to place a bet on your alma mater's homecoming game.

So for many, the safer discipline would be to do your investments and your gambling hobby at separate locations. And one last thing: In October, rarely, if ever, bet against the Yankees. On the other hand, this was one of those rare Octobers.

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