Fierce competition and new technology have pushed brokerage houses to make many changes for the better. But sadly, some of their drawbacks remain the same.
In the mid-1990s, I'd often write about how discount brokerages such as Schwab
Back then, a discount broker's $75 or so per trade seemed like a bargain, compared to the hundreds (!) of dollars full-service brokerages charged. Soon, discounters drove prices far lower, to the considerable benefit of do-it-yourself investors.
Alas, many discounters no longer merit that moniker. Low rates are widespread, and even inexpensive brokers offer research and other perks to rival their full-service brethren. In short, distinctions between the two groups are quickly fading.
Conflicts of interest
The differences that remain don't always reflect well on full-service brokers. Traditional brokerages often justified their high prices by pointing out that their dedicated brokers gave financial advice to their customers. But some of these brokers simply weren't that good, and others would rack up huge commission fees by prompting investors to trade more frequently than necessary. Some brokers were even encouraged to recommend stocks endorsed by their employer's own analysts -- companies that were, or might become, the brokerage's customers. Can you say "conflict of interest"?
A recent Reuters story suggests those practices might not be a thing of the past. UBS
While it might seem reasonable for advisors to push only the stocks their team of analysts recommend, such analysts hate to issue "sell" ratings, which can be bad for business. My colleague Anand Chokkavelu recently found that out of all 500 stocks in the S&P 500, only four had sell ratings.
That's why it can be risky to rely on brokerages' analyst ratings for your investment decisions. Their research may be insightful and helpful, but take the rating with a grain of salt. And remember, you no longer have to pay top dollar for good research reports. Many inexpensive brokerages these days offer plenty of background information at no extra cost.
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Longtime Fool contributor Selena Maranjian owns shares of Berkshire Hathaway. The Fool owns shares of Berkshire Hathaway, a Motley Fool Inside Value selection. Berkshire Hathaway and Charles Schwab are Motley Fool Stock Advisor recommendations. Try any of our investing newsletter services free for 30 days. The Motley Fool is Fools writing for Fools.