Tuesday, July 19, 2011

Who doesn't love stock brokers?

Long ago and Far away there was a land where people would invest in pieces of paper called stocks. These stocks would give them partial ownership in a large company. The only way to obtain these stocks was by calling your "trusty" stock broker. This stock broker would give you a price to buy whichever stock you desired and you would tell him how many shares. After processing the order you would hang up feeling content that you bought ownership in a company that you believed would increase in value over time. The broker laughed all the way to bank. At this point nobody realized how much the stock broker was marking up the stock because this was also a land that did not have real-time stock quotes. (Gasp! The Horror)
     Fast forward to the 1970's and you will see a shocking new development. People were starting to get curious why they were working their whole lives to save whatever they could for retirement (with meager returns) while their stock broker is eating lobster and fillet on their 40 foot yacht. Thus the discount broker was born. It was a tough road for the discount broker in the beginning. Everybody had their stock broker who they spoke with on the phone or in person. He knew their name and their likes or dislikes (keeping extensive notes doesn't hurt). If you asked your broker about these discount brokers they would try to convince you that they are: scams, frauds, bed wetters, murders, etc. They would tell you that the discount broker doesn't love you like they do and that you are not going to get the same "attention" as you do with the full service broker. At this point the full service brokers were winning but the tide was ever so slightly starting to change.
      Fast Forward to the 1990's. The introduction of "real-time" quotes (most sites have quotes that are 20 minutes delayed) blew a lot of peoples' minds. It also caught a lot of full service brokers with their pants down. People wanted to know why the stock that they see quoted at $25.00 was sold to them for $26.00 by their broker. At this point this discount broker did something incredibly smart. All trades were done at the same flat rate. Come to us and we'll charge you $20.00 a trade. Trade 1 shares or trade 5,000 shares we will charge you one low flat rate. As more and more information about how the market truly worked was made available to the everyday person they decided that they didn't need some overpriced buffoon charging them for what they could do on their own. Like any other competitive market the discount brokerage market had a big pricing war. $20 dollar trades became $18 dollar trades. $18 dollar trades became $15... $12... $9.99...
$5... $3.
      Who doesn't love a bargain? $3 dollars a trade is insanely cheap for executing a trade. If you are an active trader who does 100 trades a month you would be paying $300 dollars vs. $1000+ that you would be paying at a full service broker. Case closed use the discount broker right? Not exactly... Discount brokers have cheap transaction prices for a reason. You get no frills service (I was never one for frills anyway), they don't know my name (that's fine computers are easier to deal with people anyway), the customer service is questionable (STICKING POINT). I need to know that when I have a problem I will be able to get somebody on the phone who is interested in helping me resolve the problem. I don't want to hear that their market maker had a problem so they weren't processing transactions (as I watch my Microsoft calls that I am trying to sell deteriorate as the market starts tanking) . I don't want to hear that the platform is down during pre-market trading (as I am trying to sell my shares in a biotech company that released positive binary news). I need to know that if I am trying to perform a transaction, during the times that are specified by the discount broker, that it will get done properly. (If you want advice on which discount broker NOT to use private message me and I will let you know)
    So discount brokers are terrible and full service brokers are crooks; I guess we just shouldn't trade stocks at all, correct? Incorrect. Not all discount brokers are terrible and there might be a full service broker in some of the far reaches of the world who is not a crook. The point is that you have to make sure you do your research before you trust anybody with your money. If you have the time to do the research necessary to properly allocate your money into diverse investments then by all means use a discount broker. Just PLEASE make sure you do your research so that you don't end up arguing with customer support (who has no interest in helping you) after waiting for an hour and a half on hold. If you do not have the time/desire to do the research necessary to manage your investment portfolio then use a full service broker. Just PLEASE do not take the fees that they give you at face value. There is always wiggle room in those fees, but you are not going to get a discount unless you ask for it. Remember you do not need the broker. You may need A broker but you don't need THAT broker. So when are going in for an initial meeting make sure you go in with that attitude and watch them cut basis points off the fees and dollars of your transaction costs. You can thank me later.


  1. I agree, I have a friend though that manages to trade purely for free, he absolutely refuses to pay fees, so it is possible to trade effectively on the cheap

  2. I'm not entirely sure how he does that, but maybe he can clue me in. Even using a discount broker I still feel like I'm losing my shirt...

  3. I don't think that's possible really in any manner to trade for free. I think a discount broker is ideal for those seek little or no guidance with trades. Having a wealth advisor is highly recommended for those who do not have the time to actively manage their portfolio nor have the knowledge to do so. As for getting a lower fee, this may not be easy to do due to company guidelines. Flexibility often comes with providing the advisor with more capital to manage (likely a significant amount).

    One great alternative here is to invest in ETFs, especially over mutual funds. By investing in ETFs, you can invest and gain exposure to a variety of areas that suit your interest and/or suitability. ETFs operate with an embedded fee which is relatively low and money managers are actively putting on and taking off positions to provide returns. Some ETFs are even leveraged for those with a higher risk tolerance.

    So in summation, I think that with just little knowledge of the market, you can invest in ETFs. A discount broker works very well for those who have the time and can do their own market research, as long as you don't have the problems Andrew has had. As for most folks, a broker may be your best bet.

    -Scott Roth