Broker-aided investors have poor timing
One possible justification for using a stockbroker — as opposed to being a do-it-yourself investor, or working with a fee-based planner – is that the broker may give you good advice about when to buy stocks. Alternatively, he/she may perform a service by talking you out of trying to time the market, which is a bad idea for most people.
Well, it doesn’t work that way, according to a new study by financial planning consortium Zero Alpha Group. Investors in load mutual funds – which means they’re using a broker, since the only purpose of a sales load is to compensate the salesperson — turn out to be terrible market timers.
Because they buy when markets are near their peak, and then panic and sell at lower prices, the average load-fund investor underperforms a buy-and-hold investor in the same fund by 2.28 percentage points a year. Do-it-yourselfers aren’t great timers either — on average, they underperform a buy-and-hold investor in a no-load fund by 0.78 percentage points a year.
Still, investors do far worse with brokers’ advice than without it. And there is a group of investors who, on average, didn’t underperform a simple buy-and-hold approach:
No-load index funds are the only funds found to show no evidence of poor investor timing.
The average index-fund investor, then, has picked up two pieces of wisdom: You can’t beat the market by picking stocks, and you can’t beat the market through timing. Folks who invest through brokers, apparently, haven’t learned either lesson.
Plancorp, of Chesterfield, is one of the member firms in Zero Alpha Group. The study was done by Mercer Bullard, securities law professor at the University of Mississippi; Geoff Friesen, assistant professor of finance, at the University of Nebraska-Lincoln; and Travis Sapp, assistant professor of finance at Iowa State University.
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David Nicklaus has covered St. Louis business for more than 25 years. His column appears three days a week on the Post-Dispatch business page. 
This is just one more affirmation of what John Bogle recognized more than 50 years ago and then made available to the “average investor” when he founded the Vanguard Company offering index funds (I think in 1976). It is an absolute truism that the average investor will receive the returns of the overall (stock or bond) market, MINUS the fees/commissions of the so-called “financial professionals” who are in competition with one another to create the best IMAGE of providing financial advice that will “beat the market” by a margin sufficient to justify its cost.
This article from today’s stltoday.com web site is a case of a broker who went to such an extreme that he got caught (whereas most fall just short of getting caught):
“A Stifel, Nicolaus & Co. securities broker will pay $50,000 to investors — and another $57,500 to the state Investor Education and Protection Fund — for “unsuitable recommendations and excessive trading,” Missouri Secretary of State Robin Carnahan announced Friday.
Girard Augustus Munsch Jr. of Ladue made more than 500 trades from 2004 through early 2007 among three Missouri residents’ accounts, according to the secretary of state’s office. From those trades, he earned more than $125,000 in commissions. According to a consent order dated Dec. 14, Munsch said in a deposition that he was the only person who benefited in some of the transactions.
The order also stated that Munsch provided gifts to clients such as event tickets and use of his timeshare in Florida, and didn’t disclose them to his supervisor, which violated the firm’s policy. Munsch referred requests for comment to his lawyer, Jeff Jamieson of Blackwell Sanders LLP, who reiterated that his client neither admitted nor denied the allegations.
Munsch works at Stifel’s downtown St. Louis office and has been a “longtime employee,” Jamieson said, but he didn’t know how long Munsch has worked for the brokerage firm.
Munsch’s registration as a securities agent has been suspended until Jan. 10, and he will be under supervision for four years by his branch office manager at Stifel, according to the consent order. He also cannot have “discretionary authority” over any client account, participate in any sales contests or provide gifts to any clients for the next four years.
Stifel did not return requests for comment.”
Poor Mr. Munsch may now have to go another year or so before trading in his BMW for a new one.