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Tuesday, November 7, 2017

Alpha Teach Yourself Investing in 24 Hours: An Analysis (part 15)

                                 

What Kind of Broker Do I Need?
by
Charles Lamson

Brokers come in two basic varieties: full service and discount. There are some variations within these categories, such as a full-service broker that offers some discounted services, but the lines are fairly distinct.


Prior to the mid-1970s, there were no discount brokers. In 1975, the commission structure was deregulated. This gave birth to discount brokers who have taken investing from the country club set and made it accessible to almost everyone.


Full Service Brokers

Full-service brokers provide a variety of services to their customers, as the name suggests. In addition to brokerage services, these brokers offer proprietary research to their customers.

They make recommendations and handle all of the paperwork. Their offices are often downtown in prestigious locations and are decorated with portraits of the late 20th century rich. If you have a large enough account, you will probably be asked to lunch periodically.

Large account holders may have access to IPOs before the general public. Many of the full-service brokers now call themselves financial planners and offer other services besides executing trades.

All of this service comes with a price---sometimes a hefty price.

Do you need a full service broker? For most people, I would say no. You will learn all you need to know in this book to handle most of the transactions that the average investor makes.

However, some people are so nervous about money that they need someone to help them even if they are smart enough to do it themselves. Do not be ashamed if this is you. It is better to be honest with yourself about money, than to get into something that is emotionally difficult.

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Fee-Only Financial planner


You may also want to consider using a fee-only financial planner, especially if you have a large sum of money to invest. These professionals work to put together a complete financial plan for you that look at your total financial picture, not just your investments.

Be sure they are certified financial planners and work on a fee only. They are pricey, but definitely worth the peace of mind if you are managing a large sum.

A number of folks call themselves financial planners and may have professional designations, but charge a commission for their services. There is an inherent conflict of interest in these cases that should raise a flag of caution. Are they always going to recommend what is best for you, even if it means low commission for them, or even none it all?


Getting to Know You

There is one function full-service brokers perform that you will not get with a discount broker, and that is qualifying an investment as appropriate for your particular situation. Because full service brokers make recommendations, they have to know their customer.

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PROCEED WITH CAUTION

Brokers cannot recommend investments that are inappropriate for your particular financial situation. One of the prime directives of the securities business is to know your client. Brokers face penalties and possible loss of their license if they recommend inappropriate investment.

This requires them to learn about your financial resources and sophistication before recommending an investment. For example, they cannot recommend a high-risk investment to an elderly retiree on a fixed income. That investment would not be appropriate for that particular investor.

I think there are probably three circumstances under which you would use a full service broker or fee-based financial planner:
  • If you were managing a large sum of money
  • If managing large sums of money is terrifying to you
  • If you have neither the time nor interest in managing your own financial affairs

Discount Brokers

Discount brokers have come from no where to dominating the retail stock brokerage industry in a short 20+ years. I think there are several reasons for this:
  • Discount brokers' lower commissions have made investments profitable sooner by taking a smaller bite out of profits.
  • They are less intimidating to work with than full-service brokers for many people.
  • They have tapped into a strong desire on the public's part to take control of their financial future.
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Discount brokers started off looking very much like the full-service brokers, but with some major differences.

Many of them located in suburban areas where rents were lower. There offices often had a much more utilitarian look and, in most cases, customers were not encouraged to visit in person, although some did maintain branch offices.

Their business model for acquiring customers depends almost exclusively on marketing through television, radio, publications, and the Internet. The brokers are, for the most part, order takers who are on a salary. Their job is to execute your orders in a fast and accurate manner.

Contrast this with the full-service brokerage where the same marketing tools are used, but their brokers are required to generate business on their own.

This is done several ways, but one of the most common is for new brokers to make a list of several hundred names, addresses, and phone numbers of people they know. This is sometimes a condition of employment.

The new broker is then expected to get on the phone and contact these people to solicit their brokerage business.

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Accessing Discount Brokers

There are three basic ways to access your discount broker: by voice, over the telephone; by touch tone, using your telephone; or online, via the Internet.

Some discount brokers will allow all three methods, others just one or two. The first two are somewhat self-explanatory, although you may not be familiar with using the Touch-Tone system.

It is not much different than using your phone to access account information at your bank or navigating a voice-mail system. The system prompts you to enter certain codes, such as your account number or social security number. You will need to know the code, often the stock symbol, of the stock you are buying or selling. This system is often slightly cheaper to use than talking to a live broker.

JUST A MINUTE

A discount broker that has multiple ways to access your account may provide a margin of safety when one entry point is not working or you are away from your computer.

Most, if not all, discount brokers now have a presence on the internet. In fact, many discount brokers are almost exclusively accessed via the Internet. It is here where you will find the cheapest trades and, potentially, the most problems.

All three means of access depend on the telephone for contact. Do not leave risky positions (selling short) open without some limits, if you are going to be away from a phone for an extended period or live in an area with frequent phone outages.


Online Discount Brokers

The latest craze in the discount broker world is online investing via the Internet. The brokerage firms are drawn to this means of trading, because it further reduces costs.

This means of trading has caught on like wildfire. It is a further extension of the hands-on experience investors and Internet-savvy consumers want.

Online investing offers many advantages for the consumer. It is quick and user friendly. It is anonymous in the sense you will not have to talk to another human to complete your transaction. Investors who may have been intimidated by a broker can now trade with confidence.

*SOURCE: ALPHA TEACH YOURSELF INVESTING IN 24 HOURS, 2000, KEN LITTLE, PGS. 114-117*

END

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