Physicians and Discount or On-Line Brokerages

Posted on September 9, 2012 by Dr. David Edward Marcinko MBA MEd CMP™

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Why are Doctors and Investors Eschewing Full Service Brokers?

By Dr. David Edward Marcinko MBA CMP™

[Founder and CEO] www.CertifiedMedicalPlanner.org

There are many studies that show that active trading garners inferior results to a longer term buy and hold type of strategy.

The UC-Davis Study

One of the most publicized recently was conducted by a UC-Davis team led by Dr. Terrance Odean. The study examined the actual tracing activity of thousands of self-directed accounts at a major discount brokerage over a six-year period. The results were clear. Regardless of trading level, most of the accounts underperformed the market and showed that the higher the number of trades, the worse the result.

Link: http://faculty.haas.berkeley.edu/odean/

Ego Driven

In addition to cost savings, discounters appeal to one’s ego for business. Everyone wants to feel like a smart investor. There is also a strong appeal to one’s sense of control. Hiring a professional advisor should not result in losing these feelings, but should solidify them. And, advice to sell has a far greater impact on investment results than the cost of a purchase trade as long as the level of trading is kept at a prudent level.

Avoidance of Sales Pressure

The final reason people turn to discount and on-line brokerages is to avoid sales pressure.  Unlike the stereotypical stockbroker or financial advisor [FA], no one calls to push a particular stock.  Instead, sales pressure is created within the mind of the investor.

Assessment

By maintaining a steady flow of information about stocks and the markets to the account holders, brokerages keep these issues in the forefront of the investor’s minds. This increases the probability that the investor will act on the information and execute a trade. Ironically, this focus on trading is one of the very conflicts investors are trying to avoid by fleeing a traditional full service broker.

Conclusion

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