Discount brokers follow your orders full-service brokers give advice

BONDY ON MONEY

September 04, 1994|By SUSAN BONDY | SUSAN BONDY,Creators Syndicate

Q: Can you please explain the difference between a discount brokerage firm and a regular one? My brother uses a discount broker and says I should, too, but I'm afraid to cut corners when it comes to my investments.

A: Both full-service and discount brokerage firms provide the basic services of buying and selling securities on your behalf, and both can perform that function equally well. However, full-service firms will charge you a much higher rate, because you pay for their research and advice -- whether you use it or not. The discount brokers simply carry out your instructions.

* Discount brokers: Basically take orders. You tell them what you want to buy and sell, and they do it. There are no research services, but there are discounts on commissions -- ranging from 20 percent to 70 percent of the rates charged by full-service brokers.

For example, a discount broker may charge you a $100 commission to buy 1,000 shares of a $10 stock. A typical full-service broker's fee for that trade is $250. The discount broker, in this case, is charging 60 percent less for the same service.

Even among discount firms, the rates vary. In my random sampling of three discount firms, I found that a $170 trade at one discount firm could cost as much as $275 at another discount house. But that $275 is still less than half of the $580 charged by a full-service firm.

Most discount brokers trade bonds, options and sometimes futures. They may also offer such ancillary products as margin accounts, money-market funds, checks, credit or debit cards, individual retirement accounts, mutual funds, stop orders, consolidated statements and much more. They can also provide you with historical data and ratings on stocks and bonds.

Discount brokerage firms are for people who make their own investment decisions or for those who have large, one-time orders to place.

* Full-service brokers: Offer a complete line of investment products. They do everything discount brokers do. In addition, they provide research reports, investment advice, tax shelters, limited partnerships and initial public offerings. If you are not comfortable making your own decisions, or you are looking for new ideas, you might be better off with a full-service firm.

Full-service brokerage firms also can offer you discounts but will probably not do so voluntarily. Most brokers can automatically -- give you a discount ranging from 5 percent to 25 percent, according to firm policy. Greater discounts are possible but must be approved by manage ment. Discounts are granted to profitable accounts or for large trades. In any case, it doesn't hurt to ask. If the idea of negotiating for lower commission rates is difficult for you, remember that a $10,000 transaction takes about the same amount of work as a $1,000 transaction. Therefore, the higher tickets have more "fat" in them.

Susan Bondy founded her namesake financial services company 1980 to provide financial planning and asset management. She is a frequent guest on "Good Morning America," the "Today Show" and National Public Radio. She is the author of "How to Make Money Using Other People's Money." Write to Susan Bondy in care of The Sun, 501 N. Calvert St., Baltimore, Md. 21278. All letters will be treated confidentially.

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