What Do Clients Get for Those Brokerage Fees?
Supermarket comparison shoppers could have a field day in the brokerage industry, where prices for seemingly identical goods can vary by hundreds of dollars.
But instead of food and produce, what you buy at a brokerage is a go-between--someone who can help you purchase stocks and bonds for your investment portfolio. The fee for the go-between’s services will cost you an average of $218 if you go to a full-service broker but only $56 if you go to a “deep discounter,” according to a recently published survey.
What do you get for the $162 difference? Advice.
Full-service brokerage houses often provide their customers with investment reports crammed with advice and brokers bent on giving suggestions. Although customers of PaineWebber, Smith Barney, Merrill Lynch and other full-service houses often make their own decisions and simply inform their brokers about what they want to buy and sell, the advice-giving aspect is ever present and available. And customers should realize that they’re paying for it.
Discount brokers, on the other hand, cannot tell their customers what stocks they should be buying and selling. Discounters merely execute trades at their customer’s request. But customers who need financial information about companies they’re interested in can usually get it through the discount brokerage house. For example, most discounters have copies of ValueLine and Standard & Poor’s research reports available to clients who ask. However, the discounter will not scribble “great buy at $21.125” across the top of the client’s copy.
When weighing the pros and cons of a discounter versus a full-service broker, investors must decide whether they want or need a broker’s advice. They should also consider whether their full-service broker provides some other valuable service that’s worth the lofty price.
Anyone who answers “no” to both questions should certainly consider discount brokers. Cost savings for an active investor can be staggering.
Consider the results of Mercer Inc.’s 1992 survey. Mercer, a New York-based publishing house, puts out an annual discount brokerage directory and trading price survey that lists sticker prices for a variety of sample trades.
An investor who bought 1,000 shares for $5 per share would pay a $148 fee to a “typical full commission broker,” according to the survey.
But the investor would pay only $45 to the cheapest discounter for the same trade, the survey said. Potential savings: $103.
Meanwhile, an individual who wanted to buy 100 shares that cost $40 each would usually pay $99 at a full-service house, but would pay between $25 and $40 at about 30 discount brokerages, the survey said.
The bigger the trade, the bigger the difference in price.
For example, someone who bought 5,000 shares for $50 each--a $250,000 transaction--would pay $2,248 at a full-service house, compared to prices ranging between $135 and $375 at the least expensive discount houses. Available savings: $2,113. (Some firms will negotiate rates for large trades, however, so savvy investors may not pay the “typical” full-service price.)
It is worth mentioning that the cheapest discounters are rarely the best known. Mercer lists the comparative rates for “the big three” discounters--Charles Schwab, Fidelity Discount Brokerage Services and Quick & Reilly--on all trades. But, in most of the examples, they are among the highest-priced discounters shown.
“It’s like buying a name brand,” says Mark Coler, Mercer’s president. “Why do people pay more for Bayer aspirin versus a chemically identical aspirin? There is no tangible advantage, but it makes them feel better.”
However, in some cases, the big discounters have more products to sell. In addition to stocks, they’ll also sell bonds and mutual funds, for example. If dealing with only one brokerage firm is important, and bonds and mutual funds are on the investing agenda, the name brand might be worth the extra price.
Still, as survey results clearly show, shopping around can be worth a bundle.
How do you go about finding discount brokers? Aside from getting referrals from friends and checking telephone directories, Mercer’s directory is probably a good bet.
The New York-based publishing house sells its annual survey and discount brokerage directory as a $34.95 package; the telephone number is (800) 582-9854. The two-book set should be used in concert. One gives rates for a variety of sample trades. The other reveals pertinent information about individual discounters, including account insurance protection, whether the firm is licensed, miscellaneous charges and their toll-free phone number.
