Pros and Cons of Discount Brokers for Dividend Investments
Discount brokers are best for the do-it-yourselfer. If you like to do your own research, understand how to trade, and don’t want investment products pushed on you, you’d probably prefer a discount broker.
The difference between discount brokers and full-service brokers is the same as the difference between a cashier and a top-notch salesperson. Like a cashier, a discount broker simply processes the transaction after you already decided, on your own, what to buy (as opposed to the full-service broker who, like a salesperson, helps you choose the right products and services to meet your needs and then processes the transaction). A shady salesperson, however, may try to sell you products and services that put more money in his pocket rather than the products and services that are truly best for you.
Discount broker advantages
When you see the title discount broker, you pretty much know the one big advantage that discount brokers have over their full-service counterparts: They charge less to process buy and sell orders. Some charge as little as $3 to process a transaction, regardless of how many shares you buy or sell.
Another big advantage is that except for the relatively small transaction fee, the broker doesn’t have any vested interest in what you’re buying or selling. Though that may seem like a disadvantage, it prevents any conflict of interest. The broker has nothing to gain through the sale of a particular investment product, so she has no reason to try to influence your choices.
Discount broker disadvantages
With discount brokers, however, you pay less and you get less. You voluntarily give up any expert advice a broker may have to offer. As a result, you’re flying solo. However, that doesn’t mean you’re flying blind. Most discount brokers provide plenty of educational materials and research tools to help you screen for stocks and track market conditions. Some may even provide access to analyst reports from top Wall Street firms.
Another drawback you can expect from some discount brokers is that although the transaction fees are low, the broker may charge other fees to make up the difference, including inactivity fees, fees for closing an account, paperwork fees, IRA custodial fees, and maintenance fees. You can mitigate any losses from these fees by researching brokers carefully, comparing fees, and avoiding brokers who are clearly set up to take their clients to the cleaners.