Over the years, I've bought plenty of winning investments and have picked my fair share of losers. But the best investment I ever made was the money I put into my first discount brokerage account.
Learning the hard way
Unfortunately, that wasn't my first investment. Before then, I worked with a full-service broker who provided some great lessons on what not to do with your money:
- His first recommendation was to sell the few investments my parents had saved for me, and put everything into mutual funds.
- Of course, those mutual funds were proprietary broker-sold funds, complete with high costs and 12b-1 marketing fees. Not only were they expensive, but they also didn't even manage to match the performance of index funds.
- A few years later, after learning how much I could save by switching to similar funds with lower costs, I saw that those funds also came with deferred back-end sales charges -- meaning that I'd have to pay a hefty fee to dump those shares.
- Meanwhile, the benefits of customer service that supposedly came with a full-service brokerage firm were pretty much lost, because my account was too small to warrant much attention from my broker -- except for occasional solicitations to needlessly switch funds.
Losing several hundred dollars provided plenty of incentive to do things the right way, and so my next investment was in low-cost index funds. Realizing that the large-cap index fund I chose held the same shares of IBM (NYSE: IBM ) and AT&T (NYSE: T ) as my old broker-sold fund did saved me well more than 1% in annual costs.
In addition, seeing the wide variety of funds made me realize the value of diversification. That led me to buy not just that large-cap fund, but also a small-cap index fund that now includes stocks like Brocade Communications Systems (Nasdaq: BRCD ) and Human Genome Sciences (Nasdaq: HGSI ) .
The final frontier
Yet I knew there was a lot more to investing than just using index funds. That's why opening a discount brokerage account was the real turning point.
For the first time, no financial intermediary had control of my money. I was solely responsible for picking stocks, placing orders, and tracking my progress. And I didn't have to worry about a full-service broker trying to convince me to do something I didn't need to do.
Fly on your own
Many investors with full-service brokers feel uncomfortable transferring their hard-earned assets to a discount broker. They think they'll miss out on personalized service, research tools, or other perks that online brokers can't match.
But discount brokers have come a long way over the years since Charles Schwab (Nasdaq: SCHW ) gave investors their first discount option in 1975. Just take a look at our broker collection and you'll see the wide range of services offered by discount brokers like ShareBuilder, TD AMERITRADE (Nasdaq: AMTD ) , E*TRADE Financial (Nasdaq: ETFC ) , and Scottrade. You don't need to be a stock expert to invest through a discount broker.
One of the best features of discount brokers, though, is how you call the shots. If you need help, it's available -- but unlike many full-service brokers, you won't have it constantly thrown at you if you don't want it. And although discount brokers have the same profit motive to encourage you to make transactions to generate commission income, they typically don't have a dedicated person whose compensation is directly tied to whether or not you make a certain number of trades or buy a certain investment. That reduces any potential conflict of interest and makes it much more comfortable for you to invest the way you want.
Give it a try
So if you're still dealing with the hassles of a full-service broker -- or you've never opened a brokerage account at all -- then take a closer look at what discount brokers can offer you. Opening a discount brokerage account could easily be the best investment you'll ever make.