Stockbrokers fall into two basic categories: full service and discount. The type you choose really depends on the type of investor you are. Simply put, full-service brokers are suitable for investors who need guidance, while discount brokers are better for those investors who are sufficiently confident and knowledgeable about stock investments to manage with minimal help.
Table of Contents:
1. Full-service brokers
Full-service brokers are just what the name indicates.
They try to provide as many services as possible for investors who open accounts with them. When you open an account with a brokerage firm, a representative is assigned to your account. This representative is usually called an account executive, registered representative or financial advisor by the brokerage firm. This person usually has a securities license and is knowledgeable about stocks in particular and investments in general.
What they can do for you
Your account executive is responsible for supporting, answering questions about your account and the securities in your portfolio, and negotiating your buy and sell orders. Here are some things full-service brokers can do for you:
- Offer guidance and advice. The biggest distinction between full-service brokers and discount brokers is the personal attention you receive from your account representative. You can be on a name basis with a full-ser-
deputy broker and disclose a lot of information about your finances and financial goals. The representative is there to make recommendations on actions and funds that will hopefully be suitable for you. - Provide access to search. Full-service brokers can give you access to their investment research department, which can give you in-depth insight into a particular company. This information can be very valuable, but be aware of the pitfalls.
- Help yourself achieve your investment goals. In addition to advice on specific investments, a good representative knows you and your investment goals and then offers advice and answers to your questions about how specific investments and strategies can help you achieve your asset building goals.
- Make investment decisions on your behalf. Many investors do not want to be disturbed when it comes to investment decisions. Full-service brokers can actually make decisions for your account with your permission. This service is fine, but be sure to ask them to explain their choices to you.
What to pay attention to
Although full-service brokers, with their seemingly unlimited assistance, can make life easy for an investor, you need to remember a few important points to avoid problems:
- Brokers and account representatives are still sellers. No matter how well they treat you, they are still compensated based on their ability to produce revenue for the brokerage firm. They generate commissions and commissions from you on behalf of the company. (In other words, they are paid to sell you things.)
- Whenever your representative makes a suggestion or recommendation, be sure to ask why and request a full response that includes the reasoning behind the recommendation. A good consultant is able to clearly explain the reasoning behind each suggestion. If you do not fully understand and do not agree with the advice, do not accept it.
- Working with a full-service broker costs more than working with a discount broker. Discount brokers are paid simply to perform the act of buying or selling stocks for you. Full-service brokers do this and more.
- In addition, they provide advice and guidance. For this reason, full-service brokers are more expensive (through higher brokerage fees and advisory fees). Also, most full-service brokers expect you to invest at least $5,000 to $10,000 just to open an account.
- Handing over decision-making authority to your representative can be a possible negative because letting others make financial decisions for you is always risky, especially when using your money. If they make bad investment choices that cause you to lose money, you may not have any recourse because you have authorized them to act on your behalf.
- Some brokers engage in an activity called churning. Churning is basically buying and selling stocks for the sole purpose of generating commissions. Churning is great for brokers but bad for clients. If your account shows a lot of activity, ask for a justification. Commissions, especially from full-service brokers, can take a big bite out of your wealth, so don’t tolerate churning or other suspicious activity.
2. Discount Brokers
Maybe you don’t need any pick-up from a broker. You know what you want and you can make your own investment decisions. All you want is someone to place your buy/sell orders. In that case, go with a discount broker. They do not offer advice or premium services, only the necessary basis for executing stock transactions.
Discount brokers, as the name suggests, are cheaper to engage with than full-service brokers. Because you’re advising yourself (or getting advice from third parties like newsletters or independent advisors), you can save on the costs you incur when paying for a full-service broker.
If you choose to work with a discount broker, you need to know as much as possible about your personal goals and needs. You have a greater responsibility to conduct proper research to make good selections of titles and you must be ready to accept the result, whatever it is. For a while, the regular investor had two types of discount brokers to choose from: conventional discount brokers and Internet discount brokers. But the two are so similar now that the differences aren’t worth mentioning. Conventional discount brokers mainly conducted business through regular offices and by phone, while discount brokers on the Internet conducted business primarily through websites. But through industry consolidation, most conventional discount brokers today have comprehensive websites, while Internet discount brokers have adapted by adding more phone and face-to-face services.
What they can do for you
Discount brokers offer some significant advantages over full-service brokers, such as:
- Lower costs: This lower cost is usually the result of lower commissions and is the main advantage of using discount brokers.
- Unbiased Service: Discount brokers offer you the ability to only make transactions on your stock buy and sell orders. Since they don’t offer advice, they have no vested interest in trying to sell you particular stocks.
- Access to information: Established discount brokers offer extensive educational materials at their offices or on their websites.
What to pay attention to
Of course, doing business with discount brokers also has its downside, including the following:
- No guidance: Since you’ve chosen a discount broker, you know you don’t expect guidance, but the broker should still clarify this fact for you. If you are an experienced investor, the lack of advice is considered a positive thing – no interference.
- Hidden fees: Discount brokers may shout at their lowest fees, but commissions aren’t their only way to make money. Many discount brokers charge extra for services you might think are included, such as issuing a stock certificate or sending a statement. Ask if they rate fees for maintaining IRAs or fees for transferring
stocks and other securities (such as bonds) in or out of your account and find out what interest rates they charge to borrow through brokerage accounts. - Minimal customer service: If you’re dealing with an Internet brokerage firm, learn about its customer service capability. If you cannot make business transactions on its website, find out where you can call for assistance with your order.
