It's a familiar rivalry. In one corner, you have traditional, "full-service" brokerages like Merrill Lynch
We've long championed the latter group, because for investors who know what they're doing, it makes sense to pay a few dollars per trade instead of a few hundred dollars. And we've also pointed out that even when you feel you need advice, full-service brokerages don't always serve you well, due to various conflicts of interest that may exist. (Some brokers, for example, have been paid commissions on certain products they sell you, so that means they have to weigh their own best interest against yours.)
These two camps of brokerages have grown more similar in recent years, as commission fees have fallen and all major players now offer stock research for customers. Both camps are also trying to offer customers as many financial services as possible. That's why some brokerages offer banking services, and many now offer financial planning advisors.
In a recent issue of SmartMoney magazine, I found an interesting article reviewing just how good the advice is that's offered by brokerages. Here are a few findings:
- The magazine tested eight firms, asking questions about common issues like 529 plans (for education savings) and life insurance. Only one, Wachovia
(NYSE:WB), had its responses rated "good" on both counts. Merrill Lynch and Citigroup's (NYSE:C)Smith Barney earned "bad" ratings on both.
- There's an SEC regulation that frowns on brokers selling financial plans. Out of the eight firms tested, three followed the rule, while five did not.
- According to the article, a Smith Barney representative advised that "529 plans have no fees." Well, that's just plain wrong. They may be great options for many people, but they do have fees.
Why am I reviewing this material? Well, because too often, we assume that when we pay a lot for something, that's because it's better than a less-expensive alternative. That's not always the case, even among brokerages.
Also, it's important to realize how helpful it can be for you to get some financial literacy under your own belt. You probably won't learn everything you need to know, but if you're generally savvy on a bunch of topics, you'll be much more likely to notice if you're being given questionable information and guidance. You'll be less likely to end up as a sheep en route to slaughter.
Fortunately, there's a bright side to brokerages: They help us trade stocks, bonds, and funds, and help us build wealth. And increasingly, they're not even charging much to do so. Spend a few minutes in our Broker Center learning about what to look for in a brokerage, and you might end up finding a better one for yourself.
Charles Schwab is a Motley Fool Stock Advisor pick.