Discount versus Full Service Brokers
Years ago the individual investor needed access to a full service broker for research information. However, today with the growth of the Internet, there is a level playing field for the do-it-yourself investor. Let�s compare and contrast full service and discount brokers.
Price
One of the primary factors influencing an investors� decision to open an account with a brokerage firm has to do with the price to buy or sell stocks, or commission costs. Discount brokers have the edge in this category. Commission costs range from a $4 minimum cost with Sharebuilder to $12.95 with Charles Schwab. It�s not uncommon for full service brokers to have a $50 minimum charge. If you are starting with a small account, less than $10,000, then it makes sense to consider a discount broker. Otherwise, a full service firm will eat up your capital in commission costs. In addition to those costs, pay close attention to other fees such as account maintenance, wire transfer fees, check writing privileges and inactivity fees, costs charged to your account if you have not bought or sold a stock in several months. If you decide to go with a discount broker you will have the lower commissions by trading online. It�s not uncommon for a firm to have a $10 commission for trading online and a $29 charge to speak to a broker.
Research
Full service firms have the advantage in the research category. They employ analysts to conduct primary research on several stocks and provide written reports to assist investors in making buy or sell decisions. One of the reasons full service firms charge more in commissions is to help pay the fat salaries they give to their research staff. Discount brokers don�t typically have analysts because they are trying to keep overhead costs to a minimum.
Services
Another area full service brokers have an edge is in product offerings. Many of these firms offer insurance products, mortgages, credit cards and checking accounts in addition to investment accounts. Discount brokers are no frills shops, so don�t expect to receive any of these additional products if you choose to go that route.
So which is best?
If you decide to go with a discount broker be sure check annual surveys to see which firms offer the best service (Barron�s Magazine and Smart Money Magazine are worth checking out). Often times you get what you pay for, so try not to let price be the determining factor. Service and trade execution are very important as well. You may find a broker that charges a $5 commission, but if there website is down or brokers aren�t answering the phone when you need to place a trade(which has happened to me) you can lose a lot more money on the actual transaction than you are saving in commission costs. If you would like to receive one-stop shopping for all of your financial needs, then a full service broker makes sense. You will pay for it in the form of higher costs, but that convenience can give you peace of mind, which is worth a lot.
