What's Wrong with Full-Service Brokers?
We favor the discount brokers, who execute trades for about one-twentieth the amount that full-service brokers often charge. Where discount brokers typically charge between $5 and $20 for an individual online trade, you will probably pay around $150 for the average trade done through the typical full-service broker. Further, full-service firms often charge annual "maintenance" fees through which they grant themselves a generous slice of your assets, say about $150 a year or more.
Alternatively, full-service brokerages might grant "unlimited free trades" in an account, but will charge you around 1% to 1.5% of your total assets -- per year. In other words, full-service brokerages provide help at a very high cost.
So do you get twenty times the value by using one of those brokers who work for Merrill Lynch, Salomon Smith Barney, Morgan Stanley Dean Witter and others? We do not think so. Most brokers who give advice are just glorified salesmen, shopping around their brokerage house's stock picks or pricey mutual funds. Why should not they? Brokers get paid a percentage (the commission) for every sale they make. By receiving commissions on each trade, their compensation is closely tied with how often their clients' accounts are traded. In other words, part of the commission you pay to the firm may wind up directly in your broker's pocket.
It is this direct conflict of interest that makes us bristle. Until full-service brokers are paid based on how well your investments perform and not based on account activity, we will remain highly distressed.