Mahogany-paneled conference rooms, wing-tipped shoes, Wall Street addresses. The full-service category includes all the names that come to mind when we think of stockbrokers: Merrill Lynch, SmithBarney and Morgan Stanley. While these firms have higher commissions and fees than the discount brokers (much higher), they do offer a range of services and amenities the others do not.
Those begin with research and advice. During a bull market, when stocks are going up consistently, good ideas are a dime a dozen. But when the markets turn choppy, solid advice can save you. Indeed, during periods of unpredictability, many investors turn to full-service shops. Some of these firms also offer a range of mutual funds, estate-planning services and tax advice. A broker will set up a financial profile for you -- based on your assets, income and goals -- and advise you accordingly. All of this, of course, will cost you.
If all you plan to do is buy some mutual funds and you know which ones you want, then paying a broker to round them up for you doesn't make much sense. (see Buying Mutual Funds below). As for basic advice, we've got recommended fund picks in almost any category and can help you set up an asset-allocation plan, a retirement strategy or college tuition fund.
But if you want to buy individual stocks and lack the time or experience needed to do the research yourself, you might as well find a good broker. Ask around among your friends or colleagues -- you want someone you can trust. You can also consult a new tool from the Securities and Exchange Commission, namely the Investment Adviser Public Disclosure Web site, which can aid your search.
Also, if you do go the full-service route, there are several things to watch out for. First, make sure you get a commission schedule that spells out the fees you'll have to pay. It's also important to know how your broker is paid. Will he get higher commissions for selling certain financial products -- whether or not they're best for you? Always ask. At the very least, that will clue him in that you're on your toes.
Inquire, too, about accounts that let you pay an annual fee instead of per-trade commissions. For about 3% of your total assets, a broker will set you up with an asset-allocation program and make investment decisions accordingly. This eliminates the potential problem of "churning" -- when a broker unnecessarily trades your account to ratchet up commission fees.
Discount and Online Brokers
Our view is that many investors can make investing decisions on their own. That, of course, is what this Web site is all about. And if you have a firm idea about a stock you want, why not get it as cheaply as you can?
Some discount brokers -- particularly firms like Charles Schwab and TD Waterhouse -- are looking less and less like the pure order takers they used to be. They've been adding advisory and account-management services and they've beefed up their "mutual-fund supermarket" offerings. The result is that they aren't as cheap as the pure online guys, but they aren't as expensive as the full-service brokers either.
Since most discounters have Web sites now, the lines have also blurred between discount and online-only brokers. True Internet upstarts like E*Trade, though, still offer rock-bottom trading costs and few frills. The low costs can be tempting, but keep in mind, with a pure online broker you won't have the option of visiting a branch office to make a deposit in person or to speak with someone face-to-face. Your relationship will be limited to e-mail and phone contact.
And while trading online can be cheap, it can also be a horror show. During times of high volume in the markets, servers can become overloaded and create extensive trading delays. You can call customer service to complain, but in some cases you'll wait as long as an hour. Checks get lost in the mail, orders go unfilled -- you name it. Our view is that unless you trade a lot, you should avoid the deep discounters. They just aren't reliable enough yet.
Buying Mutual Funds
You have your choice here. You can get your broker to pick you some funds -- accepting both high fees and limited choice. Or you can choose your own funds and buy them either straight from the fund company or through one of the new mutual-fund supermarkets.
If you favor the broker route, you'll likely be offered a set of "load" funds either run by the broker's firm or a mutual-fund company it contracts with. A load means you pay an upfront fee in addition to any annual expenses charged by the fund. Depending on your time horizon -- that is, if you plan to own the fund for 10 years or more -- the fee might be worth it. But there are plenty of no-load funds out there that can get the job done for you.
To buy a no-load you can either call the fund company directly (each Fund Snapshot provides a firm's toll-free number), or you can go to one of the mutual-fund supermarkets run by firms like Charles Schwab, Fidelity or E*Trade. There, you'll pay a commission to make the trade. But you'll have instant access to literally thousands of funds of all types.
