When you're choosing a broker for your investments, you'll need to decide whether to get a full-service broker or a discount broker. Before you make the choice, learn the difference between the two types.
"Full-service" may sound better, but that's not always the case. It really depends on the types of investments you'll be making.
Here's a guide to the two types of brokerages, what they can offer you, and what they might cost.
- Full-service brokers work for large brokerage houses like Merrill Lynch Wealth Management, Edward Jones, and Morgan Stanley.
- All brokers will execute trades for their clients, but a full-service broker will also research investments and give advice.
- Some of the best-known discount brokerages are E-Trade Financial Corp., Fidelity Investments, Charles Schwab Corp., and TD Ameritrade.
- Discount brokers often make more sense for the average investor because they're more affordable, and if you want to make your own decisions, a discount broker may be the way to go.
Full-Service Brokers: Service, but at a Price
Full-service brokers work for large brokerage houses like Merrill Lynch Wealth Management, Edward Jones, and Morgan Stanley. All brokers will execute trades for their clients. But, a full-service broker will also research investments and give advice.
However, unless you're very savvy about the ins and outs of investing, you won't know whether you're getting good advice. It's also hard to tell if your broker is any better than you are at choosing investments.
The ideal full-service broker researches investments with your goals in mind and gives you investment ideas and recommendations. They should also be able to keep you up-to-date with market trends, stock performance, and tax laws.
What Does a Full-Service Broker Cost?
Fees differ between companies, but you can expect to pay a healthy fee for full-service brokerage services. The ideal client for a full-service broker is someone who has a large portfolio, but who doesn't have the time or desire to manage their own investments.
Make sure that you have the final word on any changes. Beware of any wording to the contrary in your written agreement.
In return for these services, full-service brokers charge high fees when you buy or sell stocks. For instance, you might pay as much as $250 for a trade with a full-service broker. The same service would cost between $0 and $25 online with a discount broker.
Full-service brokers also charge annual service charges or maintenance fees on your account. Most disturbing, because most full-service brokers receive commissions every time they make a trade for a client, their compensation is largely set by how many times they buy and sell stocks in your account. Those who are less scrupulous may be buying and selling stocks simply to earn more fees.
This is not to say that you shouldn't use a broker. But, if you do, go into it with your eyes wide open. Do your research before choosing a broker, and never give them carte blanche to invest your money.
Discount Brokers: DIY for Experienced Investors
Some of the best-known discount brokerages are E-Trade Financial Corp., Fidelity Investments, Charles Schwab Corp., and TD Ameritrade. Discount brokers often make more sense for the average investor because they're less costly. If you want to make your own decisions, a discount broker may be the way to go.
The key difference is that you're making trades yourself, without the advice of an experienced broker. That in itself can make using a discount broker risky if you're not well-versed in the finer points of choosing stocks.
Before you sign up, make sure the broker deals in the type of investment you plan to make (stocks, bonds, mutual funds, etc.). Review the schedule of fees to find out what you'd be paying for commissions, account maintenance, and other fees.
Also, check out the list of other services the brokerage offers. Think about whether you want to be able to write checks on your account, make trades over the phone, or access research about different stocks, bonds, and mutual funds.
Opening a Brokerage Account
Once you choose a brokerage, download the application forms from their website and send them in with a check, or fill them in online. If you complete the forms online and use electronic funding to transfer money into your new account, you can be trading investments the same day.
Full-service brokerages may require a minimum balance. If you're opening an IRA, they may waive this requirement. Discount brokers may have much lower investment minimums. In some cases, you may be able to open an account with $0.
After you've opened your brokerage account, you can begin making trades. Remember, though, that whether you use a full-service or discount broker that your portfolio isn't set-it-and-forget-it.
Take time to review your investments to ensure that they're delivering the type of returns you need, with the amount of risk you're comfortable taking. And be sure to read any messages your broker sends you, so you're aware of any changes to your account or investments.