Cheaper is not always better

Investor's expertise should dictate type of broker selected

Investing

February 06, 2000|By Bill Atkinson | Bill Atkinson,SUN STAFF

If you could buy 100 shares of America Online Inc. for $5, why would you pay $104?

That is the question many investors are asking themselves these days because the cost of buying and selling stocks is suddenly all over the map.

Use a full-service broker, and the trade can cost about $104. Place the order with a discount broker online and it's $29.95. Or use an online deep-discount broker and the fee falls to a rock-bottom $5.

"Obviously, where there is choice there is opportunity, but on the other hand, choice often begets confusion and temptation," said Jonathan D. Pond, author of "Your Money Matters."

Never before have there been so many ways for investors to buy and sell stocks, bonds or mutual funds. But just because one way might be cheaper or more convenient doesn't mean it's the right way, financial experts say.

Investors should consider several factors before settling on whether to use a full-service broker, a discount broker, or a deep-discount broker, they say.

The decision should depend on their knowledge of the stock market, the amount of time they spend researching companies, their overall confidence level and the size of their portfolio.

"The investor needs to be very up front at how good they are at investing, how sophisticated they are, or how unsophisticated they are," said Dan Burke, senior brokerage analyst at Gomez Advisors Inc., a Lincoln, Mass.-based e-commerce research and consulting firm.

An investor with a large sum of money, little knowledge of the market, and little stomach for risk, might opt for a full-service broker.

Brokers don't simply process transactions, they give advice on "appropriate" investments after considering the investors' age, financial goals and tolerance for risk. They also provide clients with information on companies, bond issues, initial public offers and mutual funds.

Brokers who work at larger investment houses receive reams of research that should give them insight into specific companies and industries.

"If the broker provides you with valuable information on which stock to buy, or the timing to buy and sell, then the full-service broker would be a better choice," said Robert Webb, a former commodities and bond trader, who is professor of finance at the University of Virginia in Charlottesville.

A good broker takes the emotion and worry out of investing. If shares of AOL plunge, the broker might calm a nervous client and assure them that the swoon is just a blip. Instead of selling, like the pack, they might buy more shares looking for a rebound.

But there are drawbacks to full-service brokers. Besides being expensive, brokers don't always keep clients up-to-date on the performance of their portfolio.

There is also an inherent conflict within the business, experts say. Brokers earn commissions on each transaction, so the more stocks or bonds an investor buys and sells, the more the broker makes.

"I think there are lot [of people] in the brokerage industry who are just there to make their own mortgage payment," said Mary A. Malgoire, an investment adviser at the Family Firm Inc. in Bethesda. "They don't have the research background and skills."

The less Malgoire's clients trade, the better, because trading fees can hurt a portfolio's performance by eating away at the gains, she said. "Being an investment adviser, I have a bias to having a long-term plan, and not trading a lot in and out," she said.

But some of her clients have "sandbox" accounts of, say, $10,000 that they can play with. They understand an industry, such as technology or health care, do their research and invest that portion of the money, she said.

Malgoire's clients who manage sandbox accounts often use discount brokers like Charles Schwab, E*Trade or a DLJdirect, which offer tips on investing and information about companies and the stock market.

Want to find out about AOL? Investors can punch up the Web sites of a discount brokerage and sift through Standard & Poor's research reports, review analysts' earnings estimates, long-term stock performance charts and catch up on the company news.

"They help individuals by giving them the tools and resources to make appropriate investment decisions," Burke said.

Gomez.com recently rated online brokers after looking at how easy they are to use, on-site resources and customer service. Schwab topped the list, followed by E*Trade, DLJdirect and Fidelity Investments, the Boston-based mutual fund company.

But trades are not always cheap with these firms because investors pay a premium for the information that is provided.

Buy 100 shares of AOL through Schwab and it costs $29.95 if the trade is placed over the Internet, $49.50 if done electronically by punching phone buttons, and $55 if a broker makes the transaction.

That is why they might not be the best place to trade, especially for investors who are experienced and have research materials at their finger tips, experts said.

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