Is there any reason to return to full-service brokerage firms in a world full of discount brokers with $4.95 trades? Full-service firms come with commissions that can run as high as $400, $600, or even more per trade. But these types of full-service firms might be a better fit for you despite the costs.
- You're just paying to get your trades made with a discount broker such as E*TRADE or Charles Schwab.
- A full-service broker can be worth the cost if you don't have financial experience or if you want the comfort of a hand to hold.
- Perhaps the biggest benefit of a full-service firm is having access to a pro who can guide you through the process.
What You Get From a Full-Service Firm
You're simply paying to get your trades made with a discount broker, nothing more. This can be ideal if you've been trading for a while and you know the ropes. It can work well if you have an understanding of businesses. It's a good option if all you need is someone to place your trades.
There's such strong competition among discount brokers that the cost of commissions has come down. Many investments trade with no commission at all.
A full-service broker can be worth the cost if you lack experience and don't mind paying for a hand to hold. A full-service broker can be worth the cost in these cases.
Services and products offered aren't the same across the board. Costs will vary from firm to firm. But you should expect some or all of certain services from your full-service broker:
- Access to research on stocks and bonds
- Retirement planning
- Tax preparation and guidance
- The ability to handle unique trade requests
- A chance to invest in certain private equity or hedge funds
- Access to initial public offerings
Perhaps the biggest benefit of a full-service firm is the chance to have someone knowledgeable guide you through the process. It's almost certain that the fees will cut into your returns. But you may be better off in the long run because a good broker can guide you through turbulent markets. They can help you avoid mistakes like selling at market bottoms or buying during speculative bubbles.
Resist the temptation to bail. Many investors are the first to admit that they don't know much about the market. They'll call their broker and complain about a few-percent drop. Stay the course if you have a reputable firm with a proven history of good, long-term results.
An Alternative to a Full-Service Firm
A direct stock purchase plan or a dividend reinvestment plan might be a good deal for you if you don't have a lot of capital to invest or if your goal is to buy and hold stocks for the long term (10 years or more). You might not hear about these plans because they don't produce profits for the brokerage houses.
They're low-cost plans that allow you to buy shares straight from a company, paying only $1 or $2 in commissions through optional cash payments or regular, recurring withdrawals from a checking or savings account. You should receive a statement each quarter showing the reinvested dividends, as well as purchases, sales, stock splits, or other factors that caused changes to your account.
You'll have a simple, cheap way to build equity in some of the biggest names in the world if you put together enough of these plans.