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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."

Read/Post Comments (3) | Recommend This Article (20)

Comments from our Foolish Readers

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  • Report this Comment On August 03, 2009, at 5:43 PM, mgrin10 wrote:

    Agree fully, and if anybody is still have doubts, let me share my horror story:

    My recent experience with the Financial Network Investment Corporation has shown me that the company is providing very little value (negative in my case) to an investor, while charging ten or more times discount broker’s commission. In addition, its problem resolution performance is far worse than almost every other full-service or discount brokerages I have dealt in my 20+ investment life.

    More specifically: in the latest margin call incident (three instances) the company failed to:

    • Notify of outstanding margin call (even most of discount brokers would send you e-mail) despite my direct request and their assurances.

    • Advise/Consult on position liquidation

    • Timely advice of sales, even when I was on the phone with a broker discussing related issues a day after position liquidation

    In my previous investment experience with full service brokerages even lousy ones I never experienced even the first one, since, I believe, they like to get more money under their management and don’t like losing clients. Apparently the Network cares less. I have never even heard of firms failing all three, let alone on three separate margin events.

    As far as problem/complaint resolution goes, the Network wasn’t too great either. Even after admitting failure to communicate, the network didn’t bother to offer standard industry solution to deal with trading mishaps-- restoration of positions, despite of the fact that it would cost them only $2,000-3,000 at the time. You see how much they value their customers and fairness. Instead I was offered free trades; if anyone is stupid enough to put good money after bad ones with a brokerage lacking accountability and commitment, especially in our time when they can’t guarantee their solvency long enough to deliver (my losses now is over $14,000 and growing rapidly). And, if it was not enough nauseating sugar talk and what I suspect feet-drugging, which could only firmed up my reluctance to ever deal with them unless they show real respect and willingness to right the wrong.

    Bottom line: If you are watching your bottom line, want real service and are not a masochist DO NOT INVEST with the NETWORK FINANCIAL INVESTMENT CORPORATION, an ING Company.

    Complaint text:

    In each the 2/27, 3/11 & 3/13 margin call incidents the company failed to:

    • Notify of outstanding margin call (even most of discount brokers would send you e-mail) despite my multiple direct requests and their explicit promises.

    • Advise/Consult on position liquidation

    • Timely advice of sales, even when I was on the phone with a broker discussing related issues a day after position liquidation

    Failed to offer satisfactory reimbursement despite admission of “communication deficiencies”

  • Report this Comment On August 18, 2009, at 1:24 AM, thenemo1 wrote:

    Dear MGRIN10

    I feel for the people like yopurself that receivce less than the fiduciary treatment owed them in society today.

    I will say that businesses today have gotten so large that they only care about volume/bottom&Line not customer satisfaction.

    Sure the lowly clerk in your local store is treating you better; because the giants like Walmart are kicking their butts. But they are doing it because of personal greed and fear.



    IIt seems that anything attached to the finance business is so big that they have little investment in their treatment of you as a valued customer.

    Think of it you go and invest your hard saved money and they just move it with a touch of a button.

    If they were building you a sailboat they'd be careful to use skill and care with the material they purchased because the outcome would decide if you as a customer were satisfied.

    And they'd have their time and money invested to build you a quality product.

    In the brokerage business they just take your money and pass you off to some 3rd party advice and you are the one with the hernia as you really are going it alone. You ever notice that they trade in C.D.'s that pay the most paultry of already abusive rates banks are paying; what do any of them ever do for you?

    I have little hope for the below billionaire invester.

    Sorry I can't be of help,

  • Report this Comment On December 23, 2009, at 12:11 AM, highbury11 wrote:

    I have recently had a bad experience with Stifel Nicholaus. When asking the account rep. to make a

    trade into a no load fund, I was told that if I didnt start to

    purchase investmts that produced revenue, I would be required to move my money elsewhere. I have 3 large

    retirement plans there and am steamin mad!

    Everyone should be aware of this outfit and stay clear


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