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Types of Brokers

Reprint from SchaeffersResearch.com

Full-service brokerages seek to offer just that: full service. If you establish an account with a full-service broker, you will be assigned an individual broker who will personally handle your account. The minimum account requirements and commissions of full-service brokers are generally higher than those for discount or deep-discount firms, and they often specialize in higher net worth clients. You may be able to negotiate lower commission rates with a full-service broker based on your account size and your frequency of trading. The payscale of brokers at full-service firms is usually based largely on commissions generated. This has the potential to create a conflict of interest between the broker's need for commission income and your need for winning trades, which heightens the importance of recommendations from satisfied clients. The full-service firm may offer a wide variety of services and abilities that are not available at other firms, such as personal investment advice, an increased opportunity to buy Initial Public Offerings (IPOs), a fully staffed bond desk, and an in-house investment research department.

Discount brokers came into existence in 1975 when the New York and American Stock Exchanges agreed to abandon the minimum commission schedule previously imposed on all members. These new, less-binding regulations encouraged the emergence of discount brokerage firms that charged lower commissions in return for less personalized service. Discount brokerage houses vary widely, but almost always have cheaper fees and commissions than full-service houses. Personal attention and specific investment advice are generally not part of the picture, but the discount broker usually offers convenient access to trading and customer services through a toll-free telephone number. Brokers at discount firms are often paid relatively more in salary and relatively less in commissions than their full-service counterparts, giving them less incentive to induce you to trade. On the other hand, the lack of sales incentive may make your dealings with a discount firm more impersonal, and often you will not deal with the same individual on a regular basis. Note that the gap in the degree of service between full-service and discount firms has narrowed considerably over the past decade, as has the gap in commission rates.

Deep-discount brokers arose from the discount broker camp as the gap between the discount firms and full-service brokers narrowed. Basically, deep discounters offer the lowest commission rates along with stripped-down service. These firms are geared to knowledgeable investors who need little hand-holding. Because many options traders are in this category, the options market share of the deep discounters has been growing steadily. Personalized attention at a deep discounter may be virtually nonexistent, as may be additional features such as twenty-four-hour customer service, bond trading, or foreign stock investing.

Options-specialized brokers have grown in recent years by filling a niche that was long neglected by full-service firms and by many discounters-serving the special needs of options traders. These firms generally employ ROPs to interact with clients and will often handle difficult or complex option orders or transactions that less specialized firms tend to avoid. Although not all options-specialized brokers offer deep commission discounts, most offer very attractive commission rates.

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