For some investors, fee-based brokers make a lot of sense.
The industry is divided into two broad categories: full-service or traditional brokers and discount brokers. The distinction is not always crystal clear and you may find firms that fall somewhere in between the two.
Basically, discount brokers process your order in a timely manner and at a low cost. If you are an active trader and dont need or want advice, research, recommendations or any other services, this is probably the broker type you should choose.
With full full-service brokers, you have two different ways to work with them: commission-based or fee-based. However, you may find brokers that combine the two in a hybrid arrangement.
Commission-Based BrokerCommissioned-Based brokers work for just like discount brokers except you can get access to stock recommendations and talk to a broker if you have an idea about a stock or bond, but want a second opinion.
Most full-service brokers are moving away from these types of accounts because they dont make much money and they are not very efficient for the customer who only trades a few times a year.
The value, in some eyes, of a full-service brokerage is the value added by working with the broker on your total portfolio, not just processing buy and sell orders.
Fee-Based BrokerThe fee-based broker charges customers a flat fee for most services including research, recommendations, trades and other activities. Exactly what is covered by the fee may vary from firm to firm.
The broker charges clients a percentage of assets under management that is on a sliding scale depending on the size of the account. The more assets you have in the account, the lower the percentage.
This arrangement is a good deal for the investor that wants access to the brokerages research and recommendations, trade frequently and uses other services the brokerage offers.
One flat fee covers everything and the investor doesnt worry about being nickeled and dimed with a charge for every service he needs. Most brokers bill quarterly for their fee.