Discount brokers are stockbrokers who don’t give investment advice. Discount brokers are not always human beings the term “discount brokers” can be used to describe either an individual (”Frank and Sarah are discount brokers”) or a company (”OptionsXpress and FirstTrade are discount brokers”).
Discount Brokers and Full-Service Brokers – A Comparison
In the days before discount brokers, only rich people could afford to invest. This is because the non-discount brokers charged such high fees and commissions. Starting with Charles Schwab, discount brokers became more popular among average investors, and the fees and commissions charged by discount brokers have been going down each year for the past several decades.
However, it is interesting to note that discount brokers still lag full-service brokers in overall assets under management. While discount brokers serve many more clients, affluent investors snub discount brokers in favor of their full-service counterparts.
As a result, despite the fact that discount brokers are more popular on an individual basis, full-service brokers are more popular in a total dollar basis.
Charles Schwab, the leader among discount brokers, had a total of $510 billion in assets under management as of 1999. By comparison, the full-service broker Merrill Lynch had a staggering $1.7 trillion with a “t.” The great disparity is due to the fact that large institutional shareholders and ultra-rich individual investors often need services that go beyond simply placing buy and sell orders.
For example, if someone wants to move $1 million worth of Microsoft stock, it isn’t as simple as logging into Ameritrade and placing a sell for 40,000 shares. These huge “block trades” (as they are called) require the finesse and experience of a full-service broker, and big institutions and billionaire individuals pay dearly for this expertise.
If you don’t need this kind of service, should you pay extra for a full-service broker?
Discount of Full-Service? Sometimes It’s Hard to Tell
When you choose to use one of the many discount brokers, you are making the decision that you can think for yourself, and that saving on the cost of trading is more important than added services. Full-service brokers typically offer personalized investment advice, as well as company-produced investment research reports.
While discounters do not have the time or resources to give individualized recommendations, a growing number of them are producing research reports on various stocks, bonds, mutual funds, and other investments, and others are making third-party-produced research reports available to their customers, free of charge.
Several of the web-based discount brokers offer free, real-time streaming quotes, which is something that was once only available through full-service firms. But the best way to determine whether or not your broker is a discounter or a full-service operation is to answer these questions: Does your broker provide individualized advice, from one human being to another?
Does your broker require a large (in excess of $10,000) minimum account balance? Does your broker charge you commissions for each trade, or an hourly fee for advice? While most full-service brokers still charge commissions instead of hourly fees, a growing number of them are beginning to go the hourly route, and it’s probably best to select one of these brokers if you decide you want full-service.
After all, if you’re paying for investment advice, you should be paying for investment advice – not paying excess commissions when you make a trade. In fact, some consumer advocates question the ethics of non-discount brokers who charge commissions instead of fees, saying that it encourages these brokers to recommend buying and selling, rather than holding, even when holding may be most prudent.
Discount brokers don’t encourage you to buy or sell – the decision is left entirely up to you, and most individual investors feel better about this type of arrangement. If you can get some bundled services (for free) at the same time, then all the better!
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