Brokerage accounts are a gateway between the investor and the investment professional. When it’s time to choose a full-service or discount broker, dozens of companies will compete for your business — so it can be challenging for any investor to pick the right broker.
Plus, there’s a big distinction between full-service and discount brokers. You’ll find differences in the level and types of services as well as costs when you consider a full-service vs. discount broker. The choice you make can have a big impact on your investing experience as well as how much you have to pay to invest.
Below, we’ll look at the full-service vs. discount broker toss-up more closely, presenting pros and cons you can use to make an informed choice.
When the full-service broker was the only option
The discount brokerage hasn’t always been around. Until the 1970s, Wall Street was largely regulated, and the full-service broker was the only game in town. This kind of stock broker was extremely expensive. Simple stock market trades often cost hundreds or even thousands of dollars per transaction. That high price tag largely limited investing to wealthy individuals. Brokerage companies wooed their clients to create close professional relationships. You could expect to know your brokers personally, and even socialize with them. In return for a steep brokerage charge, they’d give you the investment advice you needed to invest well.
Nowadays, full-service brokers still exist, but they’ve had to learn how to compete better in a cutthroat industry. You can find a variety of investing options with full-service brokers. Clients can opt for a traditional commission-based investment account or a fully managed account (and sometimes an account with a level of service in between).
In a fully managed investment account, the brokerage company has full discretion to trade on your behalf. This often appeals to busy people who don’t have the time or inclination to manage their own investments.
The high cost of a full-service brokerage
The main downside to a full-service brokerage is the high cost. Commission rates aren’t quite as high as they once were. But you can still expect to pay a lot more per trade with this kind of service than you will with a discount broker. Those who take advantage of management services often pay a percentage of their total assets in fees each year. Typical full-service offerings are priced from 1% to 2% or more. You could pay thousands of dollars in annual management expenses for a $100,000 brokerage account.
For some, that might seem well worth the cost not to have to worry about investments. But as you’ll see below, investing with a discount broker isn’t as hard as you might think. Many have resources that can help you invest better without breaking the bank.
What discount brokers can do for you
Options for investors began to grow with the rise of Charles Schwab in the 1970s. Schwab revolutionized the brokerage industry by introducing the concept of a discount broker. Now, there are dozens of reputable discount brokers. They tend to share these favorable traits:
- Low commission fees and trading fees on stock trades
- Online trading platforms to simplify investing
- Often no minimum deposit to open an account and start investing
- Most have trading tools to help you evaluate and select investments
- Variety of accounts, like a regular taxable account, a mutual fund, an IRA, or another type of tax-favored account
Comparing a full-service vs. discount broker, you’ll find that even among discount brokerages, there is a big difference in the way they provide these services. Whether you’re a seasoned investor, or a beginner looking for a great broker, these differences add up.
When it comes to discount brokers, benefits range from few to many. At one discount brokerage, you may find a sophisticated trading platform with ample access to useful research tools. At another, you may encounter more confusing trading interfaces. Some have a steep learning curve before you can feel comfortable using their tools properly.
When choosing between a full-service vs. discount broker, cost is a factor. Don’t overlook the advantage discount brokers have over their traditional broker counterparts. Some of the best online stock brokers let you buy and sell stocks for a flat fee of less than $10 per trade. That’s a tenth or less of the fee you might pay at a high-priced full-service broker. You will even find more than one online broker who gives access to certain investments with no commission at all. That means you get to keep all the money that would otherwise go to cover brokerage fees.
View more information: https://www.fool.com/the-ascent/buying-stocks/full-service-vs-discount-broker/