What Is a Discount Broker vs. A Full-Service Broker?

A full service broker offers just that—a higher level of personal service for your investments, but at a higher cost. See which type of broker might be right for you.
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A discount broker carries out buy and sell orders at a reduced commission rate as compared to a full-service broker. A discount broker might be a good alternative for an investor handling their own investments while a full-service broker might be a good choice for an investor who wants to offload this work.

What Is a Full-Service Broker?

A full-service or traditional broker is usually a registered rep affiliated with a major brokerage firm like Merrill Lynch, Morgan Stanley  (MS) - Get Report or a host of other similar firms. Full-service brokers usually facilitate and execute securities trades for their clients. They may offer services such as portfolio and wealth management for their clients.

"Full-service" usually means full commission as well. The commissions or other transaction costs are generally much higher than you would encounter at a discount broker. These brokers not only buy or sell stocks or other exchange-traded investments like ETFs, but also extend to sales loads and trailing loads on many of the mutual fund share classes used by these brokers.

Many of these firms may offer managed accounts and other services such as loans of various types plus the sale of insurance and annuity products. Full-service brokers often wear the dual hat of adviser and financial salesperson, as a fair amount of their compensation often comes from the sale of financial products.

What Is a Discount Broker?

Discount brokers have come onto the scene in recent years. Some familiar names in this space include Charles Schwab  (SCHW) - Get Report , TD Ameritrade  (AMTD) - Get Report and a host of others. These firms offer a range of financial products and services; in some cases this includes financial advice. A number of online discount brokers now populate this space as well.

Trading online is generally much cheaper than via a full-service broker, and these firms often offer a large menu of no-transaction-fee mutual funds. Some, like Fidelity, Schwab and Vanguard offer their own families of mutual funds as a well a wide menu of funds from other mutual fund providers. In recent years, a number of these firms have offered trading fees as low as $0. In some cases, this is for their own ETFs, in others it may be for a set number of transactions for new customers.

A number of discount brokers have added advice services of various types. Some allow access via physical locations, others via phone or online. The quality of these advice services vary as with any service of this type. Investors should always be conscious of the fact that these advisers are generally employees of the discount broker and may have a bias towards the broker’s own products, for example, their ETFs or mutual funds if applicable.

Alternatively, many independent financial advisers may custody their client’s assets at a discount brokerage firm. Schwab, Fidelity, T.D. Ameritrade, Vanguard and others have robust platforms dedicated to independent financial advisers. Their clients benefit from the wide availability of financial products generally available from these discount brokers.

What’s Right for You?

The right option for you, of course, will depend upon your situation, your own investment experience and the type of services that you feel you might need as an investor.

Full-Service Brokerage Firm: Pros and Cons

Pros:

High level of service: As the name implies, full-service brokerage firms offer a high level of service to investors. These firms usually have deep research departments that provide research for investors on a number of individual stocks, market sectors and other areas.

Useful resources: Stockbrokers and registered reps at these firms provide high-touch service to clients. This ranges from executing trades for clients to full portfolio management. These firms have a large amount of resources and information at their disposal that can be useful to their customers.

Cons:

Cost: Full-service often means high cost. The commissions and transaction fees associated with buying and selling securities at these firms can be significantly higher than at a discount brokerage firm. Beyond transaction fees, brokerage customers might experience account maintenance fees and other service charges during the course of the year.

Incentives: Brokers at full-service firms are often compensated based on sales or the client activity fees that they generate from their accounts. This means they may be incentivized to encourage their clients to trade, or choose investments not necessarily in the client's best interest.

Discount Brokers: Pros and Cons

Pros:

Lower costs: Especially for those investors who are comfortable doing their own investing, or perhaps those that work with an independent adviser, a discount broker might be the right answer. Low fees and expenses can be an important component in determining investment success; discount brokers are often much more cost-effective for investors than a full-service brokerage firm.

Cons:

A daunting field of choices: Discount brokers vary widely in terms of their fees, the types of products they offer, the types of accounts offered and in the range of services offered. Like anything else, it pays to do your research before deciding on which discount broker to use, or if this is the best route for you.

It's mostly DIY: If you are an investor who does not have a lot of experience or knowledge in the investing arena, a discount broker may not be the best option for you. Likewise if you are a wealthy client and need some very specialized services, a discount broker may not be right for you unless you are working with a financial adviser who custodies client assets there.

What to Know Before Opening an Account

Regardless of whether you go with a full-service broker or a discount broker there are some things to do upfront.

  • Look at the services offered to ensure they dovetail with your needs.
  • Be sure to understand the commission structure plan any and all fees that you will be assessed.
  • Understand what’s involved in opening an account. Be sure to read the fine print on the account applications. What types of transactions or holdings (if any) are prohibited?

Review and Adjust as Needed

Regardless of which type of broker you go with, it's important to monitor your investments and your investment results regularly. Are your returns in line with your expectations?

You should also review the service you are receiving, especially if your choice was a full-service brokerage firm.

Remember, nothing is forever. Firms change and there is turnover among the people working there. Stay on top on your investments and periodically revisit what you need from your brokerage firm. Don’t be afraid to make a change if needed.