Hector Rojas, Spring 2017 Student Intern
This week, I’ll be exploring the questions you should ask as you think about selecting a broker. Keep with us all week to learn about the questions to ask to protect yourself. Let’s start with the most basic question:
What is a stockbroker and what do they do?
We begin by defining the term “broker.” A broker is an individual who is paid on commission for executing customer orders.
There are two general categories of brokers. Brokers that specialize in completing the transactions for which clients ask are known as “discount brokers.” These brokers offer little or no research or investment advice to their clients.
In addition to executing trades for clients, some brokers provide research, advice, tax, and retirement assistance. These brokers are commonly referred to as “full-service brokers.” These brokers typically recommend certain products to their clients after working with the client to determine their investment goals.
Why does this matter?
If you could guess which broker charged the higher commission rates, which would you pick? Is it the discount broker or is it the full-service broker? If your intuition is to say that the discount broker charges less commission, then you are right. Discount brokers charge lower commission rates than full-service brokers do. The distinction is an obvious one. Full-service brokers simply offer more services to their clients, which come at an additional price.
If you’re trying to decide between the two, consider asking yourself the following questions: do you have experience trading, do you have the time and ability to perform your own research, are you an active trader? Talk with the potential brokers and firms and ask about the benefits they provide.
So, there you have it. An introduction to selecting a broker. But there is much more to learn before trusting your hard earned money with a broker. In part two of this five part series we will dive further into the role of the broker generally. In addition to this, we will discuss the standards by which broker conduct is reviewed. By the end of part three, you will understand the importance of properly researching and selecting your broker and the standard their recommendations are judged by.