Online Broker Advertising

February 27, 2018

It seems the frequency of online broker advertising on TV or the internet has increased dramatically.  There are two distinct, separate messages.  The message is either lower your cost or the superiority of trading tools. 

 

The first message is that you can lower your cost factor by investing through their firm.  The online brokers that deliver this message are largely promoting their proprietary Robo-advisor.  My thoughts on a Robo-advisor are that even though they provide a better (lower cost) financial planning solution than the traditional method of investing through a financial advisor, why not cut the cord completely and Be Your Own Financial Advisor.  The BYOFA investor has significantly lower cost than Robo-Advisors offer.  See my January 11, 2018 blog post titled The Rise of the Robo-Advisor for details.

 

The second message promotes the prowess of the online broker’s trading tools.  This, in effect, promotes trading.  I can understand why online brokers want clients to trade.  The more the client trades, the greater the revenue to the online broker.  However, no one can prove that more trading is beneficial to the client.  One thing is certain. More trading results in a higher cost factor.

 

I love my online broker, but I doubt they love me.  I trade infrequently.  I buy and hold.  I rebalance periodically, and this generates revenue for my online broker.  I am not sucked into believing that my trading and market timing prowess will add value.  In fact, I am quite certain that should I decide to trade frequently, I will harm my ability to achieve the market return.   After all, investing in financial markets is a positive sum game as all can have more than their original investment.  But, investing is a zero-sum game around the market return.  For every trader that outperforms the market return, an equal dollar amount must underperform the market return.  This is pre-cost.  Cost makes it worse.  Also, through my online broker, I am certain to get competitive rates on GIC’s I may need to purchase.

 

I have yet to find an investment strategy that is better than investing in low cost, broad market, passively managed investment products and hold them for the long-term.  The ongoing “work” is to periodically rebalance back to the appropriate asset allocation.  There is no exhaustive investment analysis necessary.

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