March 15: Finding the right Broker for You

by David Jenyns on March 15, 2007

All investors have one thing in common. Whether they trade in penny stocks or are long-term value stock investors, they all have to work through brokers. When entering the world of the stock market for the first time, choosing a broker is your initial step and potentially the most important decision you will make. There are many choices in brokers and it is important to understand the key differences in each in order to better make your decision.

Traditionally, full-service brokers were the only type available. They charged high commission fees but also offered a lot of advice and guidance in choosing investments. In 1975, all of that changed and the discount brokers became the reigning champs of the investing world. In the last ten years, the internet has allowed individual investors to research and investigate potential stocks themselves, and even buy and sell stock. There have been advantages to the advent of the discount broker and online brokerage firm, but for some investors it has led to more mistakes in less time. The key is doing the research and investing wisely.

On one end of the spectrum are the discount and online brokers. These brokerage firms act as order takers for their investors. The investor places an order on the phone or online. The only helped offered is with the technical aspects of the website or the ordering process. There is no guidance for what stocks to buy, when to buy or when to sell. Many online brokerage firms offer their members access to stock market research, but this is provided by a third party. The account management tools help you understand how much you have invested and where it is going. These tools are normally online or downloadable. The discount and online brokers are perfect for people either already familiar with the stock market, or those who do not have much money to invest. They do require that the investor spend time researching and planning investments. If you are interested in research or want to avoid hefty brokerage fees than discount and online brokers may be for you.

The next step in service is a discount or online brokerage with an assistance broker. The assistance broker will offer a marginal amount of help. In online brokerage firms, the assistant broker takes the form of more research available and newsletters with investing tips. There is still a degree of research that needs to be done by the individual investor, but these brokerages at least point their clients in the right direction.

The traditional full service broker provides recommendations for specific stocks that would be good for your portfolio. The broker analyzes your financial situation to determine your needs. They put together an investing plan that is reviewed periodically and adjusted as needed. Full service brokers are an excellent choice for those who donít have the time or the interest in staying on top of the latest financial news. The full service broker does all the research for you and presents you with the best investments for your situation. Their clients are handled with attention to personal details and goals. This attention does come with hefty commission fees, but considering the amount of work and dedication that full service brokers provide these fees are understandable. Traditional full-service brokers make money based on the amount of transactions they facilitate.

A money manager is one step up from a full-service broker in their level of financial services. Money managers (also called financial advisors) will work with clients to improve their entire financial picture, which may or may not include investing in stocks. Money managers hold stocks and bonds for clients. Each one has his or her own unique style and so it is important that you choose wisely to make sure your money manager has the same financial philosophy that you do. The money manager will give you personalized service, an individualized portfolio and ongoing management of your finances. Money managers charge flat fees based on services rather than on transactions. A professional money manager does not receive commissions on transactions. They are paid from a percentage of the assets under their management. In that way, they are working for you and themselves at the same time. If your portfolio grows, their commission grows as well.

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