To understand the traditional difference between full-service and discount brokers, think of it this way: When dining out, your choice of restaurants ranges from Bob's Burger Pit to Chez Maurice. At Bob's, your meal is handed to you in a bag, along with change for your fiver. At Chez Maurice, your napkin is fluffed onto your lap and the bill bears a remarkable resemblance to your mortgage payment.
You have a similar choice with brokerages, deciding between the full-service broker and the increasingly popular discount broker. (Note that discount brokers have improved greatly in recent years -- but more on that later.)
Advocates of full-price (er, full-service) brokers assert that you get what you pay for. Full-service brokerages such as Merrill Lynch (NYSE: MER ) and Morgan Stanley (NYSE: MWD ) offer, above all else, advice. Their teams of research analysts study industries and companies, recommending what should be bought or sold. In exchange for this advice (which has been proven to be full of conflicts of interest), investors pay hefty commissions.
It's hard to determine commissions charged by full-service brokerages, as they don't like to publish rate schedules. It's safe to say, though, that for many of their customers, commissions run up to 5% or more of the value of a trade. For example, it might cost about $280 to buy or sell $8,000 of stock. However, some of them have introduced lower rates in recent years.
Nearer the other end of the spectrum, offering less in the way of advice or hand-holding, are discount brokers such as Charles Schwab (NYSE: SCH ) and Ameritrade (Nasdaq: AMTD ) . They're the local steakhouses of the brokerage industry, charging roughly $12 to $40 per trade. Some charge even less.
Full-service brokerages traditionally offer everything from stocks and bonds to annuities and insurance. As their brokers profit largely from commissions, they're sometimes motivated to encourage a lot of buying and selling that isn't in your best interest. Other times, they might just toss your money into a mutual fund and forget about it. There are many good brokers at full-service brokerages, though, who keep your best interests in mind and do a bang-up job for their clients. If you're taking the full-service route, you simply need to determine just how good a job your broker is doing for you, and if the cost is worth it. If you have a broker you like who's doing well for you, sticking with her might be a good idea.
Discount brokerages have traditionally offered a narrower range of services, but they've been adding significantly to this range in recent years. Indeed, the distinction between full-service and discount brokers is much murkier than it was just five years ago. Today many discounters offer mutual funds, banking services (such as checking accounts), IRAs, mortgages, and more. Some even offer fee-based portfolio consultation and investment advisor services for their wealthier clients. Others offer research reports and stock analysis. Discount brokerages compensate their brokers mainly with salaries, not commissions, making their money through high-volume trading.
Assess what services you need from a broker and how much you're willing to spend. If you're a do-it-yourself investor, get thee to a discount broker. You'll probably save enough for a meal at Chez Maurice.
To learn to more about brokerages and possibly find a better brokerage for yourself, check out our Broker Center. Since your short-term money shouldn't be in stocks, learn to put it to good use in our Savings Center, where we also offer you some good deals on interest rates.
Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article.