Full-Price vs. Discount Brokers
When dining out, your choice of restaurants ranges from Bob’s Burger Pit to Chez Maurice. At Bob’s, your meal is handed to you in a bag, along with change for your fiver. At Chez Maurice, your napkin is fluffed onto your lap, and the bill bears a remarkable resemblance to your mortgage payment.
You have a similar choice with brokerages, from the full-service broker to the increasingly popular discount or deep-discount broker.
Advocates of full-price (er, full-service) brokers assert that you get what you pay for. Full-service brokerages like Merrill Lynch and Smith Barney offer, above all else, advice. Their teams of research analysts study industries and companies, recommending what should be bought or sold. In exchange for this advice, investors pay hefty commissions. It’s hard to determine commissions charged by full-service brokerages, as they don’t publish rate schedules. It’s safe to say, though, that commissions run up to 5% or more of the value of a trade. For example, it might cost about $280 to buy or sell $8,000 of stock.
At the other end of the spectrum, offering little in the way of advice and research, are discount brokers such as Charles Schwab and Fidelity. They’re the local steakhouses of the brokerage industry, charging roughly $30 to $120 per trade. The deeper discount brokers like Ameritrade and E*TRADE, the Burger Pits of brokering, charge as little as $8 per trade.
Full-service brokerages offer everything from stocks and bonds to annuities and insurance. As their brokers profit largely from commissions, they’re sometimes motivated to encourage a lot of buying and selling, which isn’t in your best interest. Other times they might just toss your money into a mutual fund and forget about it. Discount brokerages have a narrower range of services, such as no-load mutual funds. Many also feature online computer trading, for which the lowest commissions are charged. Discounters compensate their brokers mainly with salaries, not commissions, making their money through high-volume trading.
Assess what services you need from a broker and how much you’re willing to spend. If you’re a do-it-yourself investor, get thee to a discount broker. You’ll probably save enough for a meal at Chez Maurice.
