What really sets brokers apart is whether they are full-service or discount:
Full-Service Broker
The full-service category includes all the names that spring to mind when we think of brokers: Merrill Lynch, Salomon Smith Barney, Morgan Stanley Dean Witter and others. They provide a variety of services, such as personal advice, retirement planning, and tax tips. Full-service brokers offer a wider selection of investment products such as derivatives and insurance, as well as access to the company's research. All this comes with a hefty price tag. Full-service brokerages are expensive, with commissions around $150. Furthermore, full-service brokers are compensated based on how much you trade, not the performance of your portfolio. This can lead to your full-service broker advising you to trade when you don't need to (called churning when excessive).
Discount Brokers
Discount brokerages charge a reduced commission and do not provide investment advice. The best-known discount brokers are Charles Schwab and TD Waterhouse. Fees are kept low because discount brokers offer fewer products. Brokers are paid on salary and not on commission. The business model is built on having an effective system and quality service in order to put through the most volume.
Online Brokers and a Blurring Industry
A few years back, some spoke of a third category of brokerage -- those with online trading systems. Today, hardly a discount broker exists that doesn't offer online trading. Trading over the Internet has definitely benefited the self-directed investor. Commissions have been reduced and individuals exert greater control over their accounts. Online trading has affected the industry by blurring the line between full-service and discount brokers. As discount brokers become increasingly common, they are providing access to high-quality research, while the old-school full-service brokers are starting to offer online trading options.
The SchaeffersResearch.com Broker Center
Schaeffer’s Research Broker Center provides all the information you'll need to help you make an informed decision when selecting a broker. It can be found here: Broker Center It includes various broker profiles, types of brokers, information on choosing a broker, and details on setting up an account. The information goes into more detail than we provide here.
