Investors' covert ops often end in defeat

The slick TD Ameritrade advertisement running on television shows an animated figure in night-vision goggles, zooming over stock charts, making a midnight strike on the markets while the rest of the world sleeps. He is a “trading assassin,”and now that he's made a killing in his pajamas and bunny slippers, he can turn out the light and sleep soundly. Hardly. Enticing individual investors to trade on their own is a dangerous game, especially in this complex and convoluted marketplace. It is hard enough for professional investors to beat the market. To suggest that individuals can do it as well as, if not better than, the pros is at best misguided, at worst a recipe for disaster. But the financial business is full of ads from discount brokers encouraging investors to trade on their platforms. One common lure is an offer to trade for “free” for a certain period of time. Well, that depends on your definition of free. According to The Tabb Group LLC, a capital markets research firm, about half of equity trading in the United States is done by so-called high-frequency traders, folks who are amped up on computer technology to dart in and out of stocks in a flash — literally microseconds — to pick off small price differences or grab rebates offered by exchanges. Then there are dark pools. These alternative trading platforms allow investors such as mutual funds and pension funds to trade away from public markets where their orders might get filled at less-than-ideal prices. That is the marketplace for stocks that we have today. Some brokers think that investors can step into this world and manage their retirement account, play with extra cash and, perhaps, make a killing on the next Facebo— er, Apple. Sure, a buy-and-hold investor looking at a long-term time horizon could buy some shares of Citigroup, General Motors, Eli Lilly or Sears and not worry about the price at which his or her order was filled or the commission paid. But that isn't what is being encouraged — not when terms such as “trading assassin” are being used. “One company makes it look like even a baby could trade, and another one says that you can be a trading assassin,” said Adam Sussman, director of research at Tabb Group. “Both don't reflect the reality of anyone's likelihood of success.” Success? Even if investors don't care what price they paid for that share — and chances are, they won't pay what they think they are paying — how successful are they going to be? It is all about performance, and even on the institutional level, active trading isn't a sure path to success. Over the years, study after study has shown that active management tends to underperform indexing.

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But that isn't the message that brokers are sending. Financial advisers intending to act in the best interests of their clients should be encouraging them in the strongest possible terms to ignore those ads that make it seem easy to beat the market. Do they need proof of how stacked the odds are against them? The data aren't hard to find. Worst case, make sure that clients understand completely what they are getting themselves into and be ready to respond when things go south. “It would be great if a broker would [be] more of someone who protects you from the market, rather than one who encourages you to take risk,” Mr. Sussman said. “But they would have to come up with a new business model.” There is the rub.