Choosing a stock broker can be tricky. We want one that is reputable, helpful, affordable and gives us the most bang for our buck. The choice of broker can make or break an investment en-devour, and it is advisable to do your own research and try out several brokers before you commit any major amount of cash.
Full-service broker or minimalistic DIY?
Once upon a time, pretty much all stock brokers were full-service brokers and their services depended on the telegraph, the telephone and a plethora of messenger boys. Today, the internet has change this in many different ways and the full-service broker is facing competition from DIY (do-it-yourself) brokerage houses that offer lower fees and commissions.
When choosing between full-service and DIY, it is difficult to discern what an impact the choice will have on our bankroll – both short-term and long-term. Will this full-service broker actually help us become more successful with our investments or will it just be a waste of money? Maybe we will even get poor advice, guided by the needs of the brokerage house rather than the needs of the client? On the other hand, using the right full-service broker can help us grow our capital faster and also free up time and energy in our life that we can use for other pursuits.
Full-service brokers will typically offer portfolio management, advice and administration. Portfolio management involves building and maintaining an investment portfolio that aligns with the client’s desired strategy and risk-level, while also taking other special requests from the client into account, e.g to avoid certain industries. The advice part is about providing the client not just with information, but with analysis and recommendations as well. Last but not least, a full-service stock broker will carry out various administrative tasks, including trading, clearing, reporting and providing year-end tax data.
The emergence of discount brokers
Discount brokerage houses emerged in the United States in the 1980s, and was thus not a result of widespread internet usage but that of certain changes in the regulative framework. The deregulation of commission charges herald forth a new type of highly competitive environment for stock brokers in the U.S. With these discount brokers, the client actively picked stocks (and other investments) rather than act on the recommendations of the broker. The client had to take a larger responsibility for executing his or her desired investment strategy. The discount broker would just execute and settle trades, supply the client with confirmations and statements, and handle basic administration.
The full-service brokers learn to navigate a new landscape
Facing competition from discount brokers, the full-service brokers had to adapt or go the way of the dinosaurs. For some full-service brokers, this meant sharpening their claws and make it even clearer than before how great their full-service offer was for the client. Instead of just scooting by, they had to show discerning clients exactly why they should go with them instead of opting for a cheaper DIY alternative. Some full-service brokers found this difficult, and instead tried to combat the DIY brokers by lowering their own fees and commissions. Many were sucked into a ”raise to the bottom” while still never being able to reach the super-low costs of the DIY brokers.
One main conundrum that full-service brokers still have to overcome is how to make the client believe that there is no conflict of interest. If the broker gets a commission each time a trade is executed, will that not encourage the broker to carry out multiple trades rather than to take a more passive approach? Isn’t it safer for me to go with a DIY broker where I initiate all trades on my own accord?
Another problem is the fact that so many brokers – regardless of their education and experience – fail to beat a simple index fund when we look at investments from a long-term perspective. Why pay dearly to a full-service broker when I can just put money into a few index funds and then do some trading on the side on a DIY platform?
The traditional full-service model has been forced to evolve to suit the needs of today’s investors. Individual investors interested in purchasing stocks in individual companies will typically do this true a DIY broker. Investors that want to be taken care of have largely gravitated towards mutual funds, sometimes with a fund broker in between.
Private money managers
Private money managers offers a much more comprehensive service than a full-service stock broker. Private money managers have existed for centuries, but have become more noticeable since the fall of the traditional full-service stock broker. Instead of just buying and selling stocks, or putting together a somewhat more varied investment portfolio, a private money manager takes care of a whole set of financial needs, wants and requirements for an individual or for a family. In many cases, they deal with multi-generational families where there are enormous amounts of money that must be taken care of wisely to safeguard assets for present and future generations. These money managers will handle anything from investments to tax-planning, wills, pre-nups and offshore accounts. In many cases, private money management firms employ both financial advisors and lawyers.