by InvestorPlace Staff | July 29, 2010 4:22 pm
Increasingly, discount brokers are offering many of the same services as the full service guys, and they’re doing it without the high fees or the pushy sales pitches.
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The fact is a full-service broker is a salesperson. Dress him up in a suit. Call him an investment advisor or financial consultant. It doesn’t matter. He isn’t trained to analyze the market. His job is to get you to buy and sell stocks, preferably as frequently as possible.
After all, full-service brokers are paid based on commissions. If they recommend a stock for you to hold on to for a year or more, they don’t make money. If they get you to trade every week, they get commissions every week.
So why would anyone go with a full service broker in this day and age of ramped up discount brokerage services at rock bottom prices?
There are a few reasons:
1) You have a full-service broker who has made you money.
There is no substitute for good investment advice. Even zero commission trades can’t make up for bad investment decisions.
So if you’ve found a full-service broker who knows what he’s talking about, who’s actually given you good advice in the past…
…stick with him. You’ll make far more money buying a stock that gains 20% than shaving a few dollars off the commission to trade it.
2) You aren’t comfortable doing business online.
Nowadays, discount brokers and online brokers are one and the same. And though many discounters do offer automated telephone trading or broker-assisted trading by phone, they’ll charge you higher commissions for it.
If you don’t like doing business online, whether it’s making a credit card purchase or paying your bills, you probably won’t want to trade stocks online. If that’s the case, a full-service broker might be right for you.
3) You’re worried about your financial privacy.
Although there’s an argument to be made that your financial privacy can be just as compromised by a full-service broker as it could by an online broker, some investors just don’t like the idea of having all their financial information stored in cyberspace. If that sounds like you, a full-service broker may be right for you.
4) You like to see your stockbroker face to face.
Full service brokers definitely have the edge when it comes to the personal touch. If you’re the kind of person who’s willing to pay more for that one-on-one relationship, a full-service broker might be right for you.
An alternative may be a discount broker that has a large network of branches, like Schwab, Fidelity or Scottrade.
5) You don’t trade frequently.
Sure, full-service brokers will push you to trade often. But that doesn’t mean you have to go along with their recommendations. If you are a buy-and-hold investor who only trades a few times a year, a full-service broker may actually be cheaper for you.
That’s because online brokers have recognized that their best customers are active traders, too. Some even charge fees for inactive accounts.
When you take that into account, plus perhaps additional fees for IRAs or an account below a certain asset value, the discount brokers’ commissions aren’t as great as they appear.
Do the math. If you already have an account with a full-service broker and only trade a few times per year, it may not make sense to switch.
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