What's Wrong With Full-Service Brokers?

Here at The Motley Fool, we have a pretty set opinion on whether you should use a full-service broker or a discount broker (if you hadn't already gathered that from the title of this piece). Obviously, we favor the discount brokers, who execute trades for as little as one-20th (yes, you read that right) the amount that full-service brokers charge.

Where discount brokers typically charge between $5 and $20 for an individual online trade, you'll probably pay around $150 for the average trade done through the typical full-service (really, "full-price") broker. Further, full-service firms often charge annual "maintenance" fees through which they grant themselves a generous slice of your assets, say about $150 a year or more. Alternatively, full-service brokerages might grant "unlimited free trades" in an account, but will charge you around 1% to 1.5% of your total assets per year for the privilege. In other words, full-service brokerages provide help at a very high cost.

So do you get 20 times the value by using one of those expensively dressed souls who work for Merrill Lynch, Smith Barney, Morgan Stanley, and others? We don't think so. Most brokers who give advice are just glorified salesmen, shopping around their brokerage house's stock picks or pricey mutual funds. Why shouldn't they? Most of them get paid a percentage (the commission) for every sale they make. Since they receive commissions on each trade, their compensation is closely tied to how often their clients' accounts are traded. In other words, part of the commission you pay to the firm may wind up directly in your broker's pocket.

It's this direct conflict of interest that makes us bristle. Until full-service brokers are paid based on how well your investments perform, rather than on account activity, we will remain highly distressed.

If you're fascinated by the high-rolling world of full-priced brokers, we go into more detail in Step 6 of our "13 Steps to Investing Foolishly."