Published in: Buying Stocks | Feb. 19, 2019
Online vs. Traditional Brokerage: Which Is Right for You?
By: Dan Caplinger
These two types of brokers offer different services -- and have much different costs. Here's how to figure out which one you'll be happier with.Image source: Getty Images.
Brokerage accounts have become must-have tools for investors. But the internet revolution has dramatically changed the way that people invest. It used to be that traditional brokerage companies had to visit clients in person or take orders over the telephone in order to comply with the regulatory restrictions that governed their business. Now, though, you can find brokerage companies that will let you handle all of your financial matters without ever talking to a person directly, instead doing all of your transactions online or by mobile device.
Many think of traditional brokerage companies as being full-service brokers that charge big commissions in exchange for extremely personalized service. However, even discount brokers typically offer options that you can use if you're not comfortable investing online -- although the benefits of doing so might not be as great as if you use their internet-based platforms instead. Below, you'll learn more about the differences between online and traditional brokers to see which one makes more sense for your needs.
The great digital divide
Online brokers are only as old as the internet. However, many of the discount brokers that people use today predate the commercial use of the internet, and they used more traditional methods of soliciting business. Many discount brokers used sophisticated automated telephone systems that collected order information electronically, requiring extensive use of phone keypads to make trades and conduct other business. That might sound completely unwieldy by modern standards, but at the time, that technology was on the cutting edge of innovation, and it allowed discount brokers to do a lot more business than they would've been able to do with only call center-based customer service personnel.
Conversely, even the most staid, traditional full-service brokers now have plenty of online and mobile capabilities. The wealthy clients that most often use full-service brokerage companies demand easy access to information about their accounts, and brokers have responded by sparing no expense to give investors the tools they need to make transactions, do investment analysis, and get personal financial information online. At the same time, though, these high-maintenance clients also demand ready access to customer service support when they need it, and they're largely unwilling to settle for less-than-perfect automated tools when they have an immediate need.
The move toward online brokerages
Brokerage companies of all kinds have recognized the cost advantages of getting their clients to do business online rather than in person or through other methods that require personal attention. That's why full-service brokers have been able to keep their costs relatively high, because those brokerage companies that rely the most on online transactions typically can't afford to offer the same cut-rate commissions and other fees for more personalized service.
Even within the discount brokerage world, there are financial incentives to push clients toward the online side of the business. Some discount brokers will let you do trades over the phone or at physical locations in major metropolitan areas, but you might have to pay a significantly higher commission in order to make purchases or sales by that method than you would if you simply did the same transaction online. A few low-cost brokers have almost no way to take orders other than by computer or mobile device, making them most suitable for those who are comfortable relying exclusively on electronic access.
For the most part, online brokers can handle just about any transaction that a traditional broker can. Especially for those who primarily trade individual stocks, mutual funds, or exchange-traded funds, online brokerage access is simple and easy to use. In fact, many users find it more burdensome to speak directly to a customer service representative.
Should you use an online brokerage or a traditional brokerage company?
There are some major advantages to online brokerages that make them the better choice for most people. As long as you're okay with the following traits of online brokerages, then they'll typically be the more convenient way to invest toward your financial goals:
- To use an online brokerage effectively, you have to be comfortable not being able to do financial transactions at times when you don't have internet access. Given the nearly ubiquitous presence of wireless networks today, it's rare that you can't make a transaction if you absolutely have to, but it's still a consideration to take into account.
- Online brokerage platforms aren't perfect, and they're sometimes apt to temporary outages. Unfortunately, those outages often happen at times of high volume, which are sometimes exactly when you really need or want to get a trade made.
- You have to be able to double-check and triple-check your data entry before doing the final execution on your online trade requests. Adding an extra 0 by mistake to a stock order can be a painful and costly experience.
- Many online brokers have increasingly sophisticated procedures for computer security, such as two-factor authentication or even dedicated encryption. Jumping through the hoops of using these systems can be tiresome, even though they're intended to protect you from what could be devastating financial damage.
On the other hand, traditional brokers work best for those who are most comfortable doing business in person or by phone. Even though some brokerage companies that do most of their business online do have telephone options, the customer service representatives that those brokerages employ -- especially among the lowest-cost brokers in the industry -- aren't always as experienced or familiar with investing as those where dedicated investment professionals are there to pick up calls.
Get the broker you want
Online brokerages bring the power of the internet to your investing, and that's a powerful advantage in an industry in which time is often of the essence. The convenience of online and mobile access for investing eliminates the need to connect with and communicate your intentions to live customer service representatives, and many people find it to be a quicker and more efficient method for handling their investing. Yet traditional brokers are still available for those who remain steadfast in their resistance to handling their finances online, and they're likely to remain an available option for the foreseeable future -- despite their added costs.
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