Having an expert around to watch your back and call your attention to potentially incredible investment opportunities may sound like an ideal arrangement, but before you take the plunge, consider the following pros and cons of hiring a full-service broker.
Full-service advantages
A trained, skilled, and experienced full-service broker who's committed to serving your best interests can save you loads of time, energy, and worry while potentially boosting your portfolio's earnings more than enough to cover his fees and commissions. A great broker eats, sleeps, and breathes Wall Street. His job is to research companies, keep his finger on the pulse of the stock market, and earn his clients' money, all of which you may not have the time, skill, or interest to do yourself.
Depending on your broker and the relationship you develop, you may receive some additional perks. A good full-service broker examines your financial situation and helps you develop a custom plan. Such a plan is likely to go beyond investing in the stock market and may include developing a budget or savings plan, obtaining sufficient life insurance, offering tax-saving strategies, and planning your estate.
Regardless of whether you fly solo or hire an expert, stay on top of your finances. No one cares as much about your money and how fast it grows as you do. That's because no one else depends on it for their retirement or other goals.
Full-service disadvantages
Enlisting the assistance of an expert always comes with a price tag. In the case of a full-service broker, that price tag may represent a combination of commissions and fees called transaction costs and may come in much higher than it would at a discount brokerage. In addition, a good full-service broker may be reluctant to work with investors with small nest eggs and screen them out by requiring higher minimum investments. This bias isn't automatically a bad thing as long as you have the money, but if you don't, it may prevent you from gaining access to some of the most qualified full-service brokers.
Whether you go full-service or discount, focus on keeping costs down. Your total return, or net profit, is determined after portfolio costs. If your portfolio earned a profit of $600 one year, but it took $700 worth of expenses to build and maintain it, you actually end up with a $100 loss. To paraphrase Forrest Gump, Wall Street is like a box of chocolates; you never know what you'll get in terms of returns from year to year. So although you can't control how big of a profit you earn, you have complete control over the expenses you pay.
When dealing with full-service brokers, be aware of the possibility of conflicts of interest. If the broker is more concerned with padding her pockets than optimizing your portfolio, she may sell you investment products that are more profitable for her or her investment firm than for you. Brokers have also been known to engage in a shady activity called churning, in which they encourage clients to buy and sell more often than necessary so that the brokerage can earn a commission with each transaction.
Always ask your advisor the rationale behind each recommendation. If the advisor can't explain why a particular investment is a good one or you don't like the reason, don't buy the investment. Also keep tabs on the turnover rate of stocks in your portfolio. If your broker is constantly buying and selling (and raking in commissions with each transaction), express your concern and put a stop to it if all the activity isn't clearly in your best interest.