Whether you choose a traditional brokerage or an online version, put your potential broker through the same careful screening you would when hiring any expert. A few things to remember as you choose:
- Don't confuse brokers with financial planners. Although full-service brokerage houses provide information along with their advice, they may not tell you whether buying any stock is the wisest use of your money. Remember that all brokers are in business to make money for themselves first, and you second-maybe. This is not to say they're dishonest; it's just the way the game is played
- Know what you're paying for. Full-service brokerage firms like Merrill Lynch, Shearson Lehman, and Prudential cost more per trade than discount and on-line brokerages. The higher fee buys you information about market trends, suggestions about what to buy when, and general advising and hand-holding through the investment process. There's no guarantee that trading through a full-service broker will net a larger return on your investment, but it does spare you the trouble of following the market yourself. Of course, you must still pay close attention to how the broker is handling your money and whether you're satisfied with the results.
- Not all discount brokers are the same. Jane Bryant Quinn classifies discount brokers as either “business class or coach.” “Business class” discount brokers are known as the Big Three: Charles Schwab & Co., Fidelity, and Quick and Reilly. The Big Three offer essentially the same products and services as the full-service firms, but don't give advice on what to buy. The “coach” firms offer the deepest discounts (they charge an average of 73 percent below the full-service firms and 41 percent less than the Big Three) but they only execute trades and don't offer other services. They are mainly used by seasoned stock investors who know exactly what they want and require only the transaction itself.
- Look at e-trading. Placing buy and sell orders over the Internet is a very popular way to trade stocks and may become the primary way to execute such transactions. On-line trading doesn't entirely eliminate the “middle man,” because you still must open a brokerage account before you can begin trading, and you pay a fee for transactions. But it could be your least expensive, most flexible trading option. When evaluating on-line trading firms pay special attention to:
- How swiftly the firm executes trades
- The level of advice that's offered (if any)
- Whether the firm's research and information match your investing preferences
- The firm's track record for outages. This is still the Achilles' heel of the Internet. What methods does the firm use to shore up its reliability when on-line service is interrupted?
- Scrutinize service quality. Before choosing any firm, be sure to investigate the level of customer service provided. Even if you want no help at all with your investment decisions, you still require a basic level of customer support. Ask people who use the firm how satisfied they are in these areas:
- Hours of operation and telephone accessibility. An inexpensive brokerage that's not open when you want to make a trade is hardly a bargain. The same is true for telephone service-low trading fees aren't worth the risk of busy signals and lost opportunities to trade at the price you want.
- How swiftly trades are executed. Once you've put in your order, how fast can the firm come up with enough buyers or sellers?
- Real-time quotes. If you plan to do daily or rapid-fire trading, will this firm give the exact price of the stock at the moment you call (or log on)? What is the charge for this service?
- Easy-to-understand statements. Ask a prospective firm to send you a sample statement. You would be unhappy to find you need the Rosetta Stone to decipher the year-end account statement.
- Don't sacrifice stability. Make sure any brokerage you sign with is insured by the government-sponsored Securities Investor Protection Corporation. Don't entrust your money to a trading firm without SIPC coverage.
- Ask about a minimum. Some brokerage firms require a minimum investment to open an account. Determine how much money you want to invest, and find out if you're playing in the right league before you launch into any other questions.
- Request an information packet. Ask each prospective brokerage to send you a packet listing all their fees and charges. This is the only way to know if the rock-bottom commission fee that's advertised is a true bargain, or only the tip of the financial iceberg.
