Table of Contents
What Is a Stockbroker?
A stockbroker is a professional who executes trades on behalf of clients. An investment advisor or registered representative (RR) is also known as a stockbroker.
Brokers are typically employed by brokerage firms and handle transactions for a variety of clients, both individuals, and institutions. Commissions are usually paid to stockbrokers, although compensation methods differ by employer.
Stockbrokers are also sometimes referred to generically as brokerage firms or broker-dealer companies. They include both full-service and discount brokers, who execute trades but do not provide individualized investing advice.
Almost all online brokers are discount brokers, at least at their basic levels of service, in which trades are executed for free or for a small set of commissions. Today, many online brokers offer more advanced services with higher fees.
A Stockbroker’s Role
The broker’s primary role is to serve as the vehicle through which you either buy or sell stock. When I talk about brokers, I’m referring to companies such as Charles Schwab, TD Ameritrade, E*TRADE, and many other organizations that can buy stock on your behalf.
Brokers can also be individuals who work for such firms. Although you can buy some stocks directly from the company that issues them, to purchase most stocks, you still need a brokerage account with a stockbroker.
The distinction between institutional stockbrokers and personal stockbrokers is important:
- Institutional stockbrokers make money from institutions and companies through investment banking and securities placement fees (such as initial public offerings and secondary offerings), advisory services, and other broker services.
- Personal stockbrokers generally offer the same services to individuals and small businesses.
Although the primary task of brokers is the buying and selling of securities (the word securities refer to the world of financial or paper investments, and stocks are only a small part of that world), they can perform other tasks for you, including the following:
- Providing advisory services: Investors pay brokers a fee for investment advice. Customers also get access to the firm’s research.
- Offering limited banking services: Brokers can offer features such as interest-bearing accounts, check-writing, electronic deposits and withdrawals, and credit/debit cards.
- Brokering other securities: In addition to stocks, brokers can buy bonds, mutual funds, options, exchange-traded funds (ETFs), and other investments on your behalf.
Personal stockbrokers make their money from individual investors like you and me through various fees, including the following:
- Brokerage commissions: This fee is for buying and/or selling stocks and other securities.
- Margin interest charges: This interest is charged to investors for borrowing against their brokerage account for investment purposes.
- Service charges: These charges are for performing administrative tasks and other functions. Brokers charge fees to investors for Individual Retirement Accounts (IRAs) and for mailing stocks in certificate form.
Any broker (some brokers are now called financial advisors) you deal with should be registered with the Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commission (SEC). In addition, to protect your money after you deposit it into a brokerage account, that broker should be a member of the Securities Investor Protection Corporation (SIPC).
SIPC doesn’t protect you from market losses; it protects your money in case the brokerage firm goes out of business or if your losses are due to brokerage fraud. To find out whether the broker is registered with these organizations, contact FINRA, SEC, or SIPC. See Appendix A for more information on these organizations.
Distinguishing between Full-Service and Discount Brokers
Stockbrokers fall into two basic categories, which I discuss in the following sections: full-service and discount. The type you choose really depends on what type of investor you are. Here are the differences in a nutshell:
- Full-service brokers are suitable for investors who need some guidance and personal attention.
- Discount brokers are better for those investors who are sufficiently confident and knowledgeable about stock investing to manage with minimal help (usually through the broker’s website).
Before you deal with any broker (either full-service or discount), get a free report on the broker from FINRA by calling 800-289-9999 or through its website at www.finra.org. Through its service called BrokerCheck, you can get a report on either a brokerage firm or an individual broker.
You can find more details on this and other services (such as investor education and so forth) at. FINRA can tell you in its report whether any complaints or penalties have been filed against a brokerage firm or an individual rep.
As their name implies, full-service brokers offer a wide range of services. Their goal is to offer as many services as possible to investors who open accounts with them. A brokerage firm assigns you a representative when you open an account.
Account executives, registered representatives, or financial advisors are sometimes referred to as these representatives by brokerage firms. They have a securities license (which means they’re registered with the FINRA and the SEC) and are knowledgeable about stocks in particular and investing in general.
Merrill Lynch and Morgan Stanley are examples of full-service brokers. In addition, most brokers have full-featured websites where you can learn more about their services. Learn as much as you can before you open an account with them.
What they can do for you
You can rely on your account executive to assist you, answer questions about your account and the securities in your portfolio, and execute your buy and sell orders. Full-service brokers can assist you in the following ways:
- Offer guidance and advice: The greatest difference between full-service brokers and discount brokers is the level of personal attention you receive from your account representative. You become acquainted with your broker on a first-name basis, and you share information about your finances and financial goals. It is the representative’s job to recommend stocks and funds that would be suitable for you.
- Provide access to research: A full-service broker can provide you with access to their investment research department, which can provide you with in-depth information and analysis on a particular company. However, there are some risks associated with this information.
- Help you achieve your investment objectives: When a representative knows you and your investment goals, he or she offers you advice and answers your questions about how certain investments and strategies can help you reach your financial goals.
- Make investment decisions on your behalf: The majority of investors don’t want to be bothered with investment decisions. In full-service brokerage accounts, your broker can make decisions based on your authorization (also known as discretionary accounts, although many brokers have scaled back the use of discretion for ordinary brokerage accounts). It’s fine to use this service as long as brokers explain their choices to you.
What to watch out for
With their seemingly endless assistance, full-service brokers seem to make investors’ lives easy, but there are a few things they should remember:
- Brokers and account representatives are salespeople. They’re still paid based on their ability to generate revenue for the brokerage firm, no matter how well they treat you. Their job is to collect commissions and fees on your behalf. (They get paid for selling you things.)
- Ask why whenever your rep makes a suggestion or recommendation, and ask for a complete explanation of why. A good advisor can explain the reasoning behind each recommendation in detail. If you do not understand and agree with the advice, do not follow it.
- Working with a full-service broker is more expensive than working with a discount broker. Discount brokers charge a fee for simply buying and selling shares on your behalf. Brokers who provide full service do that and more, such as provide advice and guidance. Full-service brokers are therefore more expensive (because of higher brokerage commissions and advisory fees). Many full-service brokers require you to open an account with a minimum investment of $5,000 to $10,000, but some require higher amounts.
- It’s always dicey when others make financial decisions for you – especially when they’re using your money. Consequently, handing over decision-making authority to your rep can be a possible downside. As long as you authorized them to act on your behalf, you may not have recourse if they make poor investment choices that cost you money.
- Brokers sometimes engage in a practice known as churning. The purpose of churning is to generate commissions by buying and selling stocks. Customers do not benefit from churning, however. Request justification for high activity levels. If you do business with a full-service broker, their commissions can eat up a large portion of your wealth, so don’t tolerate churning or other suspicious activity.
Maybe you don’t need any hand-holding from a broker (that would be kind of weird, anyway). You know what you want, and you can decide what to do. To transact your buy/sell orders, you need a convenient method. Discount brokers are a good choice in this instance. Stock transactions are all they offer – no advice or premium services.
The name implies that discount brokers are less expensive than full-service brokers. When you advise yourself (or get information from third parties such as newsletters, hotlines, or independent advisors), you save on the cost of a full-service broker.
Discount brokers will need a good understanding of your personal goals and needs if you choose to work with them. It is your responsibility to conduct adequate research for good stock selections, and you must accept the results, whatever they may be.
There was a time when investors could choose between two types of discount brokers: conventional discount brokers and Internet discount brokers. But they are basically synonymous now, so the differences hardly matter. By integrating their websites with their telephone and face-to-face services, most conventional discount brokers have today developed full-featured websites.
TD Ameritrade and Charles Schwab are two examples of conventional discount brokers that have well adapted to the Internet age. Online brokers like E*TRADE, TradeKing, Scottrade, and thinkorswim now offer more conventional services.
What they can do for you
Over full-service brokers, discount brokers offer a number of advantages, including:
- Lower cost: The lower cost is typically the result of lower commissions, which is the primary advantage of discount brokers.
- Unbiased service: Since discount brokers don’t offer investment advice, they have no vested interest in trying to sell you any particular stock.
- Access to information: There is extensive educational material available at the offices or on the websites of established discount brokers.
What to watch out for
Discount brokers have their downsides as well, including the following:
- No guidance: You know that you can’t expect guidance from a discount broker, but you should be told this anyway. For knowledgeable investors, the lack of advice is a plus – no interference.
- Hidden fees: Discount brokers may boast about low commissions, but they don’t make money exclusively through commissions. Some discount brokers charge extra for services that you may think are included, such as mailing a statement or issuing a stock certificate. Make sure you know whether they charge fees for maintaining IRAs or transferring stocks and other securities (like bonds) into or out of your account, and find out what interest rates they charge for borrowing through brokerage accounts.
- Minimal customer service: When dealing with an Internet brokerage firm, find out how effective its customer service is. You can call for assistance if you are unable to transact business on the website.