What Is Bucketing?

Bucketing is a dishonest commercial practice in which a broker steals from their client. Trades are executed with misrepresented terms to profit from price differences. Both buy and sell orders can be subject to bucketing. Companies that participate in bucketing or similar activities are commonly known as bucket shops. Bucketing can also refer to a retirement strategy in which retirees divide their assets into various "buckets" and draw from them as needed.

Basics

Brokers engage in the unethical practice of bucketing, using deceitful methods to profit from trades. This deceptive maneuver involves confirming the execution of a requested trade to clients while, in reality, the order remains unexecuted. Instead, the broker endeavors to secure a more advantageous price for the trade and pockets the difference between the quoted price and the executed price as undisclosed profit.

Regrettably, brokerage firms that partake in such unscrupulous activities have earned the moniker of "bucket shops."

Deceptive Practices Unveiled: The Unethical Nature of Bucketing

In the business world, brokers have adopted a practice called bucketing, where the interests of brokers are prioritized over their clients while giving the illusion of caring for them.

This exploitative maneuver capitalizes on the client's trust in their broker. Believing that the broker will strive to secure the most favorable terms for their trades, clients willingly place their trust in the hands of these intermediaries. For a purchase order, this entails seeking the lowest possible price, while the opposite holds true for a sell order.

In reality, unscrupulous brokers leverage this trust by resorting to falsehoods. Upon processing a purchase order, they deceitfully inform the client that the shares were acquired at a specified price when, in truth, they secured the shares at an even lower price, clandestinely pocketing the difference as their own profit.

Similarly, when handling a sell order, the broker falsely claims to have sold at a predetermined price while actually offloading the shares at an even higher price. In both scenarios, the broker stealthily appropriates the discrepancy between the authentic and communicated prices, effectively pilfering the client's rightful earnings.

Notably, the term "bucket shop" historically referred to illicit or quasi-legal gambling establishments. However, in recent times, it has been applied to brokerage firms that engage in unethical practices, including the insidious act of bucketing.

Revolutionizing Retirement Planning: The Strategic Approach of Bucketing

The concept of bucketing extends beyond its traditional definition, now encompassing a progressive retirement strategy that allocates assets into distinct "buckets" according to their anticipated use. Departing from the conventional method of regular portfolio distributions, this approach focuses on securing a sustainable income stream for retirees throughout their lifetime.

In this method, retirees divide their assets into different buckets based on their time horizon. A near-term bucket contains assets that cover immediate retirement expenses, while a medium-term bucket is an intermediate reserve. Lastly, a long-term bucket, if accessed at all, is reserved for later stages of retirement.

Moreover, bucketing represents a comprehensive three-step financial planning process. Individuals aspire to attain each bucket systematically. Firstly, establishing an emergency fund forms the foundation of the first bucket. Subsequently, striving towards financial goals shapes the second bucket. Lastly, the third bucket materializes as a dedicated retirement fund.

Acknowledged as a pioneer in retirement portfolio management, Harold Evensky, a Certified Financial Planner (CFP), is credited with introducing the bucket approach. His two-bucket strategy entails a cash bucket, safeguarding five years of retirement expenditure, and a long-term investment bucket primarily composed of stocks.

The Practice of Deception: A Case of Unethical Bucketing

A seasoned broker, Steve frequently partakes in the dubious practice of bucketing. One of his clients, Linda, trusts him implicitly, relying on him to prioritize her best interests in executing trades.

Linda specifically requested the purchase of 100 shares of XYZ Corporation, setting a price limit of $10 per share or less. Promptly, Steve assures her that the trade has been successfully executed at the desired price of $10 per share.

However, unbeknownst to Linda, Steve has deceived her. Contrary to his claim, he executed the order at a lower price of $9 per share. Discreetly withholding the information, Steve slyly pocketed the difference of $1 per share as his personal profit, leaving Linda in the dark. Exploiting the situation, Steve made a profit of $100 from the trade, which rightfully belonged to Linda—a clear act of theft.

Other Implementations of Bucketing

Diversifying Investment: The Bucket Portfolio

The bucket strategy in investing involves allocating assets into distinct groups within a portfolio. For instance, a 60/40 portfolio denotes a division of 60% for stocks and 40% for bonds. Alternatively, investors who solely focus on equities may divide their portfolios into buckets based on different types of stocks, such as value stocks, growth stocks, or dividend payers. Similarly, a bond-only portfolio may categorize assets into buckets based on varying maturity dates, like short-, medium-, or long-term maturities.

Tracking Debts: The Accounting Bucket

Within the accounting realm, the concept of an "aging bucket" arises when professionals group unpaid receivables together. Companies' accounting departments monitor outstanding debts based on the duration of non-payment. Debts are categorized into aging buckets of 30, 60, 90, 120, 150, and 180 days. Depending on the extent of delinquency, companies adhere to specific policies and procedures, which may involve initiating collections processes or declaring the debts as bad debt write-offs.

Effective Money Management: The Banking Bucket

In the banking sector, bucketing facilitates efficient financial management by using multiple bank accounts. This strategy empowers individuals to allocate funds to separate accounts or "buckets" designated for specific purposes, such as monthly bill payments, savings for entertainment or vacations, and emergency funds. By automatically depositing predetermined amounts into each bucket on a regular basis, individuals who struggle with debt repayment or saving find this approach more straightforward than relying on budgeting software or spreadsheets.

Conclusion

Bucketing has diverse applications across different domains. Unethical bucketing involves deceitful practices by brokers to deceive clients and profit from price discrepancies. The term "bucket shop" refers to brokerage firms engaged in such unethical activities. The strategic approach of bucketing is used in retirement planning for sustainable income. Accounting uses aging buckets to track unpaid receivables, and banking employs buckets for effective money management. Overall, bucketing showcases its versatility and impact in finance and planning.