One of the most important decisions you'll ever make in your investing journey is whether to choose a full-service broker or a discount broker to help you. Those who can afford it often find that spending a little extra can get them a lot more in terms of quality.
What many people have found, however, is that when it comes to investing, that general rule doesn't always hold true. Often, discount brokers will give you a better customer experience, and leave you with far more money in your pocket at the end of the day.
A brief history of brokers
Half a century ago, investors didn't have much choice but to use full-service brokers. Before the advent of discount brokers, full-service financial institutions charged hundreds, or even thousands, of dollars just to execute ordinary stock trades, limiting the eligible class of stock investors to those wealthy enough to afford those high commissions. This made anything but long-term buy-and-hold investing strategies far too costly to expect a profit. In exchange for the fees you paid, you received a strong relationship with an investment professional who would happily advise you on which investments to make, and how to do basic financial planning.
When Charles Schwab (NYSE:SCHW) came along and revolutionized the brokerage business with its discount policies, the entire investing landscape changed. Now, cheap commissions have opened the door to investors with very modest sums of money. You no longer have to be rich already in order to afford a brokerage account.
Will discount brokers give you what you need?
The key question about discount brokers, though, is whether their low-cost services mean that you won't get the help you need. In the past, there was clearly a huge trade-off when you chose some discount brokers, as they'd have bare-bones trading platforms that could be confusing and create the potential for making costly trade-entry mistakes. Moreover, while full-service brokers had huge teams of research analysts available to give you information on whatever stocks piqued your interest, discount brokers historically gave customers very little research support to inform their decisions, truly leaving them on their own to figure out what to buy.
Over the years, though, discount brokers have made arrangements to provide additional services that rival some of the best that Wall Street has to offer. Many discount brokers now make third-party research available at no extra charge to their clients, while others have proprietary stock-analysis tools that can assist you in doing your own informed search for great investments.
Some brokers even have financial planning professionals on staff to help you go beyond picking investments to consider the reasons why you should invest. They can help you tailor your portfolio to meet all the financial goals you have, while keeping your risk level in line with your tolerance for volatility. By shopping around, most people can find a discount broker that will match up well with the services they want.
The big fringe benefit from discount brokers
Perhaps the most important element of working with a discount broker is that you really do end up taking full responsibility for your financial well-being. That can sound intimidating to some investors, but the alternative is leaving yourself completely open to disreputable financial professionals who take advantage of your lack of knowledge by selling you inappropriate investments. There are thousands of ethical and competent brokers out there, but there are enough cases involving brokers with conflicts of interest and other ethical problems that taking yourself out of the full-service brokerage system entirely is your best defense.
Moreover, discount brokers leave you free to make investment decisions on your own timetable. For the most part, you won't get the nagging calls to buy or sell that full-service brokers are infamous for. Many discount brokers pay their professionals on a salaried basis rather than on commission, leaving their financial interests better aligned with yours.
Full-service brokers still have a place in the investing world, for those who truly have no desire to take any part in how they invest their money. With just the smallest of efforts, though, a discount broker can take your investing game to the next level, and give you huge cost savings in the process. That's an experience every investor should have.
Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.