Many investors today dont 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 ControlIn 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.
CategoriesHere 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
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 wont get any help from them unless you stumble over the technical aspects of an order.
They wont 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 doesnt 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 dont have the time or interest in making you own investment decisions.
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.
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 doesnt 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.
Which route you go is up to you, however make sure you are comfortable with your decision and not just following the crowd.