What is a full-service brokerage firm, you ask? Let's break it down for you.
The definition of a brokerage is a business employing stockbrokers -- professionals who buy and sell assets such as stocks for their clients. A full-service brokerage, therefore, is a subset of the brokerage industry. Unlike an online discount broker, which offers a reduced number of investment options for a similarly reduced fee, a full-service brokerage offers the largest possible range of investment options -- albeit for higher fees.
But that's just the start of the story.
Who are these full-service brokers you speak of?
America's stock markets are lousy with full-service brokerage firms, but a few stand out as better than the rest. According to J.D. Power's latest (2016) Full Service Investor Satisfaction Study, Charles Schwab (SCHW -1.06%) -- which also offers discount brokerage services -- stands head and shoulders above the rest. According to J.D. Power, Schwab is the only full-service brokerage receiving a full complement of five "power circles" for customer satisfaction. Schwab's next closest rivals, Edward Jones and Fidelity Investments, tied for second place with four "power circles" each.
No one else got more than three.
What kinds of other investment options might a full-service brokerage firms offer? To start with, you can expect full-service brokers to help with buying the same stocks, bonds, options, mutual funds, and exchange-traded funds (ETFs) that a run-of-the-mill online broker would offer. In addition, though, a full-service broker might offer access to other products that your online broker cannot: Thinly traded "penny stocks", for example, or foreign-issued stocks and bonds listed only on exchanges outside the U.S. Depending on the brokerage, investment opportunities could extend to preferred access to initial public offerings, specialized forms of debt offerings, limited partnerships, or even more exotic investments.
A full-service brokerage can also offer personalized financial and retirement planning advice, help you hone your investment strategy -- possibly by producing and providing proprietary research -- and even offer tax advice. And whereas at an online discount broker most contact between the customer and the brokerage happens anonymously, via a website, full-service brokers offer face-to-face service, with a specific stockbroker or financial advisor assigned to serve as the customer's primary point of contact.
Paying the piper
Such personalized service, of course, comes at a cost. At a discount brokerage, such services are usually charged on a transactional basis: Buy a stock, pay a $10 commission. Tired of the stock and want to sell it? Ante up another $10 to sell.
In contrast, full-service brokers tend to charge a flat fee for their services. A full-service brokerage might charge as much as 1% to 2% of a client's assets -- annually -- for its services. Deposit $100,000 with a full-service broker, therefore, and you can expect that nest egg to shrink by $1,000 or even $2,000 every year, whether the stock market as a whole is experiencing rain or shine. So right off the bat, you're operating with a handicap when putting your money in the hands of a full-service broker -- and had better hope that its advice is good enough to make up the difference.
Long story short: If you find yourself engaged to a full-service brokerage, but your portfolio isn't growing at least 12% or so in value annually (the market's historic 10% rate of long-term growth, plus a couple percent points more to cover the brokerage's fees), you may be better off firing your full-service broker, and logging onto an online discount brokerage instead.