Question

Case Problem 3.2 Paul and Deborah’s Choices of Brokers and Advisors

Paul Chang and Deborah Barry, friends who work for a large software company, decided to leave the relative security of their employer and join the staff of OnlineSpeed, Inc., a 2-year-old company workingon new fiber-optic technology for fast Internet access. Paul will be a vice president for new-product development; Deborah will be treasurer. Although they are excited about the potential their new jobs offer, they recognize the need to consider the financial implications of the move. Of immediate concern are their 401(k) retirement plans. On leaving their current employer, each of them will receive a lump-sum settlement of about $75,000 that they must roll over into self-directed, tax-deferred retirement accounts. The friends met over lunch to discuss their options for investing these funds.

Paul is 30 years old and single, with a bachelor’s degree in computer science. He rents an apartment and would like to buy a condominium fairly soon but is in no rush. For now, he is happy using his money on the luxuries of life. He considers himself a bit of a risk taker and has dabbled in the stock market from time to time, using his technology expertise to invest in software and Internet companies.

Deborah’s undergraduate degree was in English, followed by an M.B.A. in finance. She is 32, is married, and hopes to start a family very soon. Her husband is a physician in private practice.

Paul is very computer-savvy and likes to pick stocks on the basis of his own Internet research. Although Deborah’s finance background gives her a solid understanding of investing fundamentals, she is more conservative and has thus far stayed with blue-chip stocks and mutual funds. Among the topics that come up during their lunchtime conversation are stockbrokers and financial planners. Paul is leaning toward a bare-bones basic discount broker with low cost per online trade that is offering free trades for a limited time. Deborah is also cost-conscious but warns Paul that the low costs can be deceptive if you have to pay for other services or find yourself trading more often. She also thinks Paul is too focused on the technology sector and encourages him to seek financial advice to balance his portfolio. They agree to research a number of brokerage firms and investment advisors and meet again to compare notes.

Questions

a.Research at least two different full-service, premium discount, and basic discount stock brokerage firms, and compare the services and costs. What brokers would suit Paul’s needs best, and why? What brokers would suit Deborah’s needs best, and why? What are some key questions each should ask when interviewing potential brokers?

b.What factors should Paul and Deborah consider before deciding to use a particular broker? Compare the pros and cons of getting the personal attention of a full-service broker with the services provided by the discount brokers.

c.Do you think that a broker that assists in making transactions and focuses on personal attention would be a good choice for either Paul or Deborah?

d.Paul mentioned to Deborah that he had read an article about day trading and wanted to try it. What would you advise Paul about the risks and rewards of this strategy?

e.Prepare a brief overview of the traditional and online sources of investment advice that could help Paul and Deborah create suitable portfolios. Which type of advisor would you recommend for Paul? For Deborah? Explain your reasoning.

Answer 1

ANS (a). We have researched about two brokerage firms, 1. Merrill-A bank of America Company 2. Interactive Brokers.

Both of them received ratings from customer 5 out of 5. having almost similar brokerage plans such as Zero commission per trade, No account premium charges etc. But Merrill has one extra feature which is promotion. They charge upto $600 for promoting trading or giving advices to their holders.

As per our research Paul is risk taker, so he should invest in equity trades, option trading etc. As in these trades returns are high also return are also high So he should go for it.

Deborah, on the other hand, should consider more less risky brokerage plans to invest such as debenture, preference share etc. Because that girl is going to start the family so a steady income is needed for that, and also running a family is also a tricky task, one should focus on family also, so she should not be able to study about charts or technicals, so she should go for easy returns and less risky plans.

Key questions depend upon the investor, if investor is riks taker then he could ask 1)how can you double my money,2) what are the future market conditions, 3) How much is the hidden cost etc.

If investor is risk averse he could ask about how much he has to invest, what is the rate of return, what is holding period etc.

ANS (b). Full service broker provide wide variety of services apart from buying and selling of shares, such as financial and retirement planning, investing and tax advisory, regular portfolio updates etc that is why charges of full service brokers are higher than discount brokers.

And if an investor is fee concious then he or she should go for discount brokerage plan. They, though not provides investment advisory services but they offer free research and development tools.

So it all depends on the targets of investor, what type of brokerage firms they choose.

So paul and deborah should consider above facts.

ANS (c).   I don't think so, as Paul has in-depth knowledge of technical areas, so if anybody tries to offer him advise then it will create confusion for him, whether to consider his own study or to trust broker.

Yes, but id Deborah is getting personal attention then that is a good choice for her as, after her marriage she will not get so much time to study and invest, if someone is there to assist her personally then it will be a great thing for her.

ANS (d). Day trading is the practice of buying and selling of securities in a single day. Day trader booked profit from movements in highly valatile stocks. The benifit of day trading is, it provides liquidity in stock market, here trader can trade quickly and without any restricltions so he can earn by arbitrage a lot of profit.

So Paul can earn frequesnt profit in day trading if his strategy is good and he has analyse all the technical things of a stock, which he is going to trade. He should have detailed knowledge of how market is moving.

So if Paul is doing day trading our advice is to use all the strategy on a dummy transaction first before putting whole capital at risk, because if a trader is going to do day trading without any knowledge and technical proficiency then he is simply a gamble nothing else.

ANS (e) Traditional investment advisor are nowadays not preferred so much as, people are more keen towards online investment. Also all the details are available online on one click. Internet has changed the way of getting knowledge. If a person wants to compare two differenct policies then he can simply go to any financial service provider's site and compare the plans offered by him, without going to any office. But it is good only to an extent as in this scenerio money is involved and a lot of online frauds are taking place, because of that a lot of people still considers traditional way of investment advisors. So, if one is going for online services then he or she should get all the information first before doing any transaction, Investor also should have all the security measure put in place, to protect the identity and information of investor.

So, Paul is a techno savvy person, he has knowledge of all the technical platforms so for him Online advisory services are recommended.

On the other hand Deborah, is a conservative person, So we are recommending traditional Investment advisory services for her.