To understand the 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.
Advocates of full-price (er, full-service) brokers assert that you get what you pay for. Full-service brokerages such as Merrill Lynch
It's hard to determine commissions charged by full-service brokerages, as they don't like to publish rate schedules. For some customers, commissions may run up to 5% or more of the value of a trade, costing them about $280 to buy or sell $8,000 of stock. (To be fair, though, many full-service brokerages have introduced lower rates in recent years.)
On the other end of the spectrum, offering less in the way of advice and hand-holding, are discount brokers such as Charles Schwab
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 may not be 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 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, go with the discount broker. You'll probably save enough for a meal at Chez Maurice.
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Charles Schwab is a Motley Fool Stock Advisor pick.
Foolish research associate Katrina Chan updated this article, which was originally published on Aug. 26, 2005. She owns no position in any of the companies mentioned. The Motley Fool has a full disclosure policy.