What's the Difference Between Full-Service and Discount Stock Brokers?
Know what you're getting before you make a choice
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. Therefore, it's important to know the difference between the two types.
"Full-service" may sound like something you should definitely have, but that's not necessarily so. It really depends on the types of investments you'll be making.
Here's a guide to the different types of brokerages, what they can offer you, and what they might cost.
Full-Service Brokers: Service, but at a Price
Full-service brokers work for large brokerage houses like CitiFinancial, Merrill Lynch Wealth Management, and Morgan Stanley. All brokers will execute trades for their clients, but a full-service broker will also research various 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, mediocre advise, or downright bad advice. It's also possible that your broker or "financial consultant" is no better than you are at choosing investments.
The ideal full-service broker thoroughly researches various investments with your goals in mind, provides you with investment ideas and recommendations, and keeps you up-to-date with market trends, stock performance, and tax laws.
What Does a Full-Service Broker Cost?
Fees differ between companies, but generally speaking, you pay a healthy fee for full-service brokerage services. Therefore, the ideal client for a full-service broker is someone who has a significant investment portfolio, but who don't have the time or desire to manage her own investments. Even so, it's important for you to have the final word on any investment changes. Beware of 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 example, you could expect to pay as much as $150 or even $200 for a trade with a full-service broker, where the same service would cost between $5 and $30 online with a discount broker.
Full-service brokers also typically charge annual service charges or maintenance fees on your account. Most disturbing, because most full-service brokers receive commissions every time they execute a trade for a client, their compensation is largely determined by how many times they buy and sell stocks in your account. Those who are less scrupulous may be buying and selling stocks in your account not because the decision is wise, but because the benefits to the broker are greater.
This is not to say that you shouldn't use a broker, but if you do, go into it with your eyes wide open, thoroughly check the broker out, and never give anybody 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 more affordable, and 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 professional advice of an experienced broker. That in itself can make using a discount brokerage 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, options, or whatever it may be). 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. Some of them may be important to you, such as the ability to write checks on your account, the ability to make trades over the phone, or the availability of research information about different stocks, bonds, and mutual funds.
Opening a Brokerage Account
Once you choose a brokerage, whether it's full-service or discount, download the application forms from the brokerage's web site 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 of anywhere from $500 to $2,000. If you're opening an IRA, they may waive the minimum 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, however, 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 periodically to ensure that they're delivering the type of returns you need, balanced with the amount of risk you're comfortable taking to manage your goals. And be sure to read any communications your full-service or discount broker sends you, especially those that contain fee information, so you're aware of any changes to your account or investments.