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Discount Brokers vs. Full Service Brokers

What is the difference between a discount broker and a full service broker?

Discount Brokers
Discount brokers are typically brokers offering advice only when needed. You are your own broker essentially giving yourself advice most of the time. This is much cheaper, all things considered. Most discount brokers such as Scottrade, TD Ameritrade and E Trade Financial, all great discount brokerages, charge a nominal fee (usually between $7 and $13) for the typical traders market orders.

But what do you really get with these discount brokers? Scottrade has a very different business model than most other discount brokers. Scottrade believes in reaching out to their customer base and providing a physical location and physical person when needed. Scottrade brokers usually are very well educated, know many strategies, and can offer intelligent advice when asked. Still the price that Scottrade asks for broker assisted trades is far less (most of the time hundreds less) than a full service broker. Scottrade has a footprint of locations across the nation of about 300, so the chances of a Scottrade office in a local community are pretty good.

One more thing to note about Scottrade is they don't micro fee the investor to death. Scottrade is the only brokerage that I know of that does not charge the investor a closing account fee or transfer out fee. That says a lot about what Scottrade stands for. One reason for this decision making could be because the company is a privately held company; all shares still are held by Rodger Riney, CEO and founder of Scottrade as of 2007. Decisions aren't influenced by shareholder interpretation but by simply Mr. Riney's intuition of what's right for the investor. All these great "for the investor" decisions and still the company finds a way to compensate their brokers fairly; brokers are paid based on a salary and bonuses based the performance of the company.

Full Service Broker
Full service brokers are typically compensated by what they sell. So, this is usually strictly commission based. This creates a motive to sell as much as possible whenever possible. If you don't have much to start with, full service brokers aren't most likely going to want to waste their time. However, if you don't have much to start with, you won't want to start with a full service broker anyway; it will eat away at too much of your nest egg.

So what do you get with a full service broker? You get their investment advice; usually you can get this same type of advice by reading the Wall Street Journal or watching Mad Money with Jim Cramer as well as other valuable resource. You may be able to call them at home early in the morning or late at night when you may have a question or two. You may also be handed, upon request, analyst data displaying your investment inquiry. This analyst data isn't prepared by your broker, but by the team of analysts that supply the same data to websites used for researching investments by many other investors just like yourself.

So now you think; is a full service broker really worth the money? Well there are a few questions to answer before making that decision like: Do you have the drive to learn how to invest your own dollars, Do you want to take the time to follow your investments, or Do you really want to save money? If you can answer yes to all of those questions, then chances are you're probably better off going with a discount broker like Scottrade and tapping into the investment advice of a broker when needed (which will only cost $27 for broker assisted trades).

Investment brokerages are not FDIC insured. They are, however, SIPC insured to cover costs of a brokerage folding; this does NOT cover any losses associated with poor investment choices or the decrease in value of investments chosen. E*Trade does have a banking institution offering savings accounts, CD's, etc. which is FDIC insured. But again their investment brokerage is not FDIC insured.

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