Pros and Cons of Using Full-Service Stock Brokers
Full-service stock brokers are just what the name indicates. They try to provide as many services as possible for investors who open accounts with them.
When you open an account at a brokerage firm, a representative is assigned to your account. This representative is usually called an account executive, a registered rep, or a financial advisor by the brokerage firm. This person usually has a securities license (meaning that she’s registered with the FINRA and the SEC) and is knowledgeable about stocks in particular and investing in general.
Examples of full-service brokers are Merrill Lynch and Morgan Stanley. Of course, all brokers now have full-featured websites to give you further information about their services. Get as informed as possible before you open your account.
What stock brokers can do for you
Your account executive is responsible for assisting you, answering questions about your account and the securities in your portfolio, and transacting your buy and sell orders. Here are some things that full-service brokers can do for you:
Offer guidance and advice: The greatest distinction between full-service brokers and discount brokers is the personal attention you receive from your account rep. You get to be on a first-name basis with a full-service broker, and you disclose much information about your finances and financial goals. The rep is there to make recommendations about stocks and funds that are hopefully suitable for you.
Provide access to research: Full-service brokers can give you access to their investment research department, which can give you in-depth information and analysis on a particular company.
Help you achieve your investment objectives: A good rep gets to know you and your investment goals and then offers advice and answers your questions about how specific investments and strategies can help you accomplish your wealth-building goals.
Make investment decisions on your behalf: Many investors don’t want to be bothered when it comes to investment decisions. Full-service brokers can actually make decisions for your account with your authorization (this is also referred to as a discretionary account). This service is fine, but be sure to require brokers to explain their choices to you.
What to watch out for
Although full-service brokers, with their seemingly limitless assistance, can make life easy for an investor, you need to remember some important points to avoid problems:
Brokers and account reps are salespeople. No matter how well they treat you, they’re still compensated based on their ability to produce revenue for the brokerage firm. They generate commissions and fees from you on behalf of the company.
Whenever your rep makes a suggestion or recommendation, be sure to ask why and request a complete answer that includes the reasoning behind the recommendation. A good advisor is able to clearly explain the reasoning behind every suggestion. If you don’t fully understand and agree with the advice, don’t take it.
Working with a full-service broker costs more than working with a discount broker. Discount brokers are paid for simply buying or selling stocks for you. Full-service brokers do that and much more, like provide advice and guidance. Because of that, full-service brokers are more expensive. Also, most full-service brokers expect you to invest at least $5,000 to $10,000 just to open an account, although many require higher minimums.
Handing over decision-making authority to your rep can be a possible negative because letting others make financial decisions for you is always dicey — especially when they’re using your money. If they make poor investment choices that lose you money, you may not have any recourse because you authorized them to act on your behalf.
Some brokers engage in an activity called churning. Churning is basically buying and selling stocks for the sole purpose of generating commissions. Churning is great for brokers but bad for customers. If your account shows a lot of activity, ask for justification. Commissions, especially by full-service brokers, can take a big bite out of your wealth, so don’t tolerate churning or other suspicious activity.