Case Problem 3.2 Paul and Deborahs 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 bachelors 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.

Deborahs 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 Deborahs 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 Pauls needs best, and why? What brokers would suit Deborahs 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.