4) Brokers and Online Trading: Full Service Or Discount?

by · August 25, 2010

Full-Service Brokers

The job of a full-service brokerage doesn’t stop when the trade is done and the papers are signed. Full-service brokers provide a variety of additional services to its clients. These services include research, personal advice, retirement planning, tax tips and more. Full-service brokers also offer a wider selection of investment products such as derivatives and insurance. With their expertise, full-service brokers are excellent for people who don’t have all the time to stay up-to-date with the current market trends and other complicated issues.

All this doesn’t come cheap. Such brokerages will charge high for their services. Expect to pay $100 or more on commissions per trade. Since full-service brokers don’t depend on the performance of your portfolio but on how much you trade to get compensated, they might advise you to trade when you really don’t need to. This unnecessary trading is called churning.

Some well known full-service brokerages are Goldman Sachs, JPMorgan Chase, Merrill Lynch, Salomon Smith Barney, Morgan Stanley.

Discount Brokers

As the name obviously implies, discount brokerages charge less on commissions per trade. These brokers don’t offer services that full-service ones do. This would include not providing investment advice or access to the company’s research. Discount brokerages normally have fewer products to offer to keep the fees down. Brokers in this type of brokerages are paid on salary and not on commissions. The business model revolves around an effective system and quality service that puts through the most volume.

Among the best-known discount brokers are Charles Schwab and TD Waterhouse.

Online Brokers and a Blurring Industry

The advancement of technology and the Internet has made a big impact in trading and brokerages. Some years back, only a few brokerages with online trading systems existed. Today you will hardly find brokers that don’t offer online trading. This is true for both full-service and discount brokerages.

In the end, trading over the internet has greatly benefited the investors. This has also caused broker commissions to decrease. What online trading has done is that it has somehow blurred the line between full-service brokers and discount brokers. Discount brokers are becoming increasingly popular and have started providing access to other services that formerly were only offered by full-service brokers.