Support our online development, and advance our onground research initiatives in free market economics, as we seek to showcase the brightest Next-Gen minds.
THE ME-P DISCLAIMER: Posts, comments and opinions do not necessarily represent iMBA, Inc., but become our property after submission. Copyright © 2006 to-date. iMBA, Inc allows colleges, universities, medical and financial professionals and related clinics, hospitals and non-profit healthcare organizations to distribute our proprietary essays, photos, videos, audios and other documents; etc. However, please review copyright and usage information for each individual asset before submission to us, and/or placement on your publication or web site. Attestation references, citations and/or back-links are required. All other assets are property of the individual copyright holder.
Fundamentals of Physician Investing
By Daniel B. Moisand CFP®, and ME-P staff
It used to be that the only way to get investments and investment information was through paying commissions to a traditional broker. Then in the 70’s (specifically, May, 1975) the brokerage industry went through significant deregulation allowing for the discounting of commissions. Charles Schwab and Company, among others, was able to eliminate the advice component and offer trades at dramatically reduced rates. The full service brokerage business responded by emphasizing the scope of their services namely research and advice in order to compete. The demand for both has continued to grow, even though research information is now readily available through many sources. These brokerage firms continue to thrive despite their poor performance in analyzing tech stocks and the Enron and Global Grossing debacles. More recent debacles in 2008-09, the flash crash a decade ago and more recent developments are legion, as well.
Fundamental Flaws
The fundamental flaw with these firms is the array of conflicts of interest between the firm and its customers. While the incentive to trade has been well chronicled as a conflict, these firms have not let consumer’s demand for a better-aligned compensation arrangement go unnoticed. Fee-based account relationships have proliferated accordingly. In theory, this type of arrangement, usually a percentage of assets, gives an incentive for performance and service rather than trade activity. This certainly has merit. However, conflicts remain that should be considered.
Pay to Play
The practice of paying brokers, higher levels of compensation for in-house products was commonplace. Today, explicitly higher payouts still exist but are less common. Instead, many firms use the sale of proprietary mutual funds and other products as part of management’s compensation. Other forms of non-monetary compensation such as a better office can be used as incentive for the brokers. The greater profitability of these in-house offerings will keep this conflict around for some time.
Subtle Conflicts of Interest
Less obvious is the conflict between the investment banking arm, the research department, and the retail brokerage operations of a firm. Even firms with no proprietary funds to sell may grapple with this issue. Here, research is pressured to say favorable things about a particular company’s stock by the investment bankers in hopes of obtaining more of that company’s business. When a firm brings a company public odds are great that a “strong buy” rating will come with the IPO. Of course, the lesson remains – consider the source.
Assessment
Traditional brokers have a somewhat higher standard of accountability than the on-line firms as to their accountability. If you buy the stock of a company that goes bankrupt through an on-line broker you have little recourse. After all, that was your choice. If a full-service broker recommended the stock to you, that broker will have to defend the recommendation.
Conclusion
Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.
Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com
OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:
HOSPITALS: http://www.crcpress.com/product/isbn/9781466558731
CLINICS: http://www.crcpress.com/product/isbn/9781439879900
BLOG: www.MedicalExecutivePost.com
FINANCE: Financial Planning for Physicians and Advisors
INSURANCE: Risk Management and Insurance Strategies for Physicians and Advisors
***
Share this:
Filed under: "Ask-an-Advisor", "Doctors Only", Alerts Sign-Up, Book Reviews, Career Development, Ethics, Experts Invited, Financial Planning, Portfolio Management, Recommended Books, Risk Management | Tagged: certified financial planner, certified medical planner, CFP, CMP, Dan Moisand, daniel moisand, david marcinko, DDS, discount brokers, DO, DPM, financial advisors, Financial Planning, full service brokerages, Health Economics, IPO, MD, physician investing, physician investors, stock-brokers, www.certifiedmedicalplanner.com |
The Leading Business Education Network for Doctors, Financial Advisors and Health Industry Consultants 
Dan and all ME-P Subscribers,
According to FA News, Morgan Stanley and TD Ameritrade were among the companies recently cited in SEC enforcement actions.
http://www.fa-mag.com/fa-news/4323-sec-cites-morgan-stanley-td-ameritrade.html
Tracey
LikeLike
On Stock Brokers
Why do people [including some doctors] hire financial advisers and stock brokers? The answer might surprise you.
Sometimes they are merely looking for someone to pull the trigger for them when they’re too shell-shocked to invest for themselves.
http://registeredrep.com/advisorland/scapegoats_and_trigger_men_2112/?NL=09-RGRa&Issue=09-RGRa_20120204_09-RGRa_224&YM_RID=marcinkoadvisors%40msn.com&YM_MID=1289283
Kathy
LikeLike
Are we at another inflection point in the prime brokerage industry?
http://www.fiercefinance.com/story/prime-brokerages-adjust/2012-04-25?utm_medium=nl&utm_source=internal
So, can prime brokerages adjust?
Randall
LikeLike
49% of Analyst Ratings on the Dow 30 Were Incorrect in 2012
Sophisticated investors around the world move billions of dollars every day on advice from Wall Street research analysts.
http://www.nerdwallet.com/blog/investing/2013/investment-stock-analyst-ratings-stockpicking-research-wrong/
But, are these analysts really as talented at stock-picking as retail investors would like to believe?
Dr. Barber
LikeLike
Stock-Brokers vs. RIAs
The wirehouse brokerage model is going the way of the dodo bird.
Brokers and their clients now recognize in increasing numbers the conflicts inherent in that model. Brokers are going independent as registered investment advisors in order to provide their clients with a conflict-free model.
Now, this does not necessarily mean they are going to generate above-market returns, buy simply that these firms are no longer working at cross-purposes to their clients.
Sigmund
LikeLike
Do Stockbrokers Fail to Disclose Red Flags?
More than 1,600 stockbrokers had bankruptcies or criminal charges in their past that weren’t reported to regulators, leaving investors in the dark, a Wall Street Journal analysis jus reported?
Frankie
LikeLike
On Stock Brokers
Agreed – brokers who buy or sell securities, often call themselves financial advisers—but they operate under separate rules. They (and some others in the industry) are primarily salespeople, and are required only to deem products “suitable” for a client based on his or her risk profile, age, investment goals and other factors.
The investments brokers recommend may come with higher fees or commissions that do more for their own bottom line than for that of their clients … Beware and skip the “cold call cowboys” who “smile and dial”.
Eurika
LikeLike