Before we get into the differences between discount and full-service brokers, it’s important to understand what a broker is. A broker is a person or company that charges a fee or commission for the execution of buy and sell orders. The submission is then sent to an investor.
Here are the differences between these two types of brokers:
Discount brokers execute trades on behalf of a client, but typically don’t provide investment advice. They charge a reduced commission in the range of $5 to $15 per trade. Their low fee structure is based on volume and lower costs. They don’t offer investment advice and usually receive a salary rather than commission. Most discount brokers offer an online trading platform that attracts a growing number of self-directed investors.
In this account, you have no one standing between you and your money. Thus, you literall, can do anything with your money. It is included in the form of selling out during a panic or buying on a margin during a boom.
For professional or experienced investors who manage their own money, this can be ideal because you don’t pay for services you don’t want or need.
For this reason, discount brokers receive a salary rather than a commission through an online trading platform. You handle the buy and sell orders.
Full-service brokers or traditional brokers provide execution services as well as tailored investment advice and solutions. The services are varied, including market research, investment advice, and retirement planning, on top of a full range of investment products. Therefore, investors can expect to pay higher commissions for their traders.
Brokers receive compensation from the brokerage firm based on their trading volume as well as for the sale of investment products. An increasing number of brokers offer fee-based investment products, such as managed investment accounts. The high commissions usually are calculated by using a percentage of the total assets and paid every year. It usually ranges from 1% to 2% or more.
The percentage may seem small, yet if you are looking at thousands of dollars in annual management expenses just for a $100,000 account.
Writer: Irly Nurvitasari