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Choosing a Broker

Which Type of Stockbroker is Right for You?

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Investing in the stock market requires the assistance of a stockbroker to execute your orders even if you don’t feel like you need their advice.

Many investors today don’t remember a time when you had no choice about the type of stockbroker to use. Full service brokers controlled the market and their high commissions were the standard.

Lost Control

In 1975, the full-service brokers lost their control of the market and discount brokers, who charged a fraction of the fees, took the market by storm.

Since then, the Internet has provided a further venue for trading efficiency. Individual investors now have access to a mountain of information never before possible.

Have all of these advancements made better investors? For the people who take the time to sort through the hype and do their homework, the answer is certainly yes. For others, technology has simply made it easier for them to screw up.

Investors now have a choice of what type of broker they want that ranges from the absolute minimum order taker to the money manager who handles all the decisions for you.

Categories

Here are four very broad categories of brokers to give you an idea of what is available so you can decide where you fall in the spectrum of services offered.

  • Discount/online broker
  • Discount broker with assistance
  • Full service broker
  • Money manager

Discount/online broker

The traditional discount/online broker is an order taker. They will take your order either over the phone or online. If it is over the phone, you usually will find they are to the point and not interested in chit-chat, which is good. You won’t get any help from them unless you stumble over the technical aspects of an order.

They won’t help you pick a stock or tell you when to sell. On the other hand, if you are dealing with them online, you may never actually talk to one of their employees.

Some online brokers offer access to research, however it is often third party. They may have account management tools, either online or that you can download.

Discount/Online with Assistance Broker

This variation offers some help to customers that stops short of full service consulting, but doesn’t leave you on your own. Their sites typically have more research than straight discount brokerage and may offer newsletters with investing tips (but not necessarily stock recommendations.)

Full Service Broker

The traditional full service broker provides recommendations of specific stocks for your consideration. The broker begins with a financial assessment of your personal situation to determine your needs and suitability for various investments.

The broker puts together an investing plan that you review periodically and make adjustments. This service is great if you don’t have the time or interest in making you own investment decisions.

Money Manger

A money manager (they may come by several other names) handles significant portfolios, which means you should have a hefty sum to invest before considering this route.

Money managers take over the responsibility for investing and managing the entire portfolio in exchange for a percentage of the assets they manage. This is expensive, however a good money manager is worth their weight in gold.

Cautions

Whichever broker you decide to use, make sure that certain safeguards are in place. Any broker you use should be covered by SIPC, the Securities Investor Protection Corporation, which protects your assets in a brokerage account up to $500,000 in the event the firm should fail. The insurance doesn’t cover trading losses.

When selecting an online broker, ask about backup plans in the event of a technical problem. In the past, online brokers have had problems during periods of heavy market activity handling all of their customer requests. Get some assurances.

Conclusion

Which route you go is up to you, however make sure you are comfortable with your decision and not just following the crowd.

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