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Choosing a broker is a serious decision that can sometimes be daunting. For that reason, the key step to start your decision-making process is to figure out whether you need to sign with a discount broker or a full-service broker.
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Investing and trading are becoming more and more popular ways to grow wealth among people of all backgrounds. With stocks continuously pushing for all-time highs, the financial markets have seen interest from the public skyrocket. And as the demand for financial services rose, so did the supply of such service providers. As a result, today, more than ever before, people are able to choose from a very wide variety of financial service providers to suit their needs.
The abundance of choice is a great thing. However, it does come with its challenges. For most people, choosing a broker is a serious decision that can sometimes be daunting. For that reason, the key step to start your decision process is to figure out whether you need to sign with a discount broker or a full-service broker.
What are these types of brokers and how are they different? Let’s explore.
A full-service broker is a financial broker-dealer firm which provides a wide variety of financial services to its clients. Such services primarily include investment research and advice. They also execute trades and help their clients with financial, tax, and retirement planning.
Additionally, full-service brokers provide services such as estate planning, portfolio construction, access to foreign markets, access to IPO shares, and more. All such brokers have a physical location open to their clients. Because they provide clients with high-end advisory services and have an actual physical location, full-service brokers are usually rather pricey. Therefore, they are a more common choice for above-average income earners.
In the early days of Wall Street, this was the only available option for investors. Brokers would try to establish long-lasting relationships with their clients. Meanwhile, clients were eager to pick the best-performing and most knowledgeable brokers. Due to the expensive nature of the business, such services were accessible only to the wealthy.
Nowadays, however, rapid financial and technological innovation has made online trading and investing possible and accessible to the masses. Information is much more abundant than it used to be. Today, ordinary people can participate in the financial markets with the help of a new kind of financial service provider, the discount broker.
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A discount broker, unlike a full-service broker, does not provide its clients with advisory, management, or planning services. Instead, it specializes in providing financial trade execution and access to the financial markets for its clients. Moreover, it does so at a discounted price compared to a full-service broker. Discount brokers usually do not provide access to a physical location for their clients. Instead, they primarily do their communicating and dealing via the internet. This allows discount brokers to save on costs.
Instead of the advisory services full-service brokers provide, the typical discount broker offers its clients an online trading platform. Such platforms are mainly designed for and geared toward traders and investors who are willing to make their own investment decisions without the help of a professional advisor.
A potential downside of a discount broker, however, is the ease with which you can get in trouble by falling victim to an online scam. Due to the large variety and the obscurity of some brokers, it is best to check what others have to say about the provider via an objective financial review website, such as Investimonials or the like.
Which Should You Choose?
Simply put, full-service brokers are a good choice for individuals who have a strong starting capital. These firms are for people who are not willing to make investment decisions without professional advice. Instead, they want expert guidance. Basically, they feel they have neither the time nor the resources to pick investments on their own. This, of course, comes at an increased cost in the form of higher commissions and various management fees.
On the other hand, discount brokers are great if you are willing to make your own investment decisions without relying on a professional advisor. In addition, although not necessarily, they are a commonsense option for those starting with a smaller capital. The trading platforms offered by the discount broker allow for better decision-making because they provide you with more information and tools to analyze the markets on your own.
Full-service brokers can be valuable if you are in a need of a more sophisticated service, such as participating in an IPO offering. While some discount brokers come close to mimicking some of the features of such services, they are no match for the assortment offered by a full-service broker.
Nowadays, choosing between a full-service broker and a discount broker is often a straightforward decision for a typical investor. In many cases, the discount broker will be the preferred choice simply due to the fact that full-service brokers are rather expensive. They can be out of the question for someone wanting to start investing without much financial commitment.
However, every case is different, and you just might need the full expertise of someone who has been in the industry for a long time and who you can trust your money with. Basically, when it comes to choosing between a discount broker and a full-service one, the choice is yours.
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