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Do you have the time?Oct 23 '00 (Updated Jan 07 '01) Write an essay on this topic.With the vast array of choices for brokerage firms out there sprouting almost every minute, which one is right for you? That all depends on mainly one thing: time. If you are a busy executive, professional or someone who doesn't have the time to spend or the will to learn about the financial markets, then the traditional broker will probably be right for you. Time is money, they say, and every minute you spend researching stocks or doing trades could probably used much more wisely if spent at your occupation or profession (eg. surgery, law, etc). It takes time to learn about the markets and may be very costly if you make the wrong call. So, rather than spending your precious time learning and keeping up with the markets, why not let a professional take care of it? At a price, the financial advisor could manage a portfolio of stocks, bonds, mutual funds, etc, provide you with a customized comprehensive financial plan which includes life insurance, estate planning, retirement planning, budgeting for your goals as well as other types of plans depending on your needs and lifestyle. There are accounts in which the investor pays for each transaction (buy or sell or other securities transactions), annual administration fees (trustee fees) for retirement accounts (in Canada). There are "wrap accounts" in which an annual all-inclusive fee is charged that is based on a percentage of the total portfolio's assets (eg. 0.5% of a $500,000 portfolio). And also, some accounts also could be based on the performance of the portfolio. It all depends on the broker and what the investor negotiates with the broker. Nowadays, the traditional broker is required (by securities laws in Canada) to take courses in financial planning and also expected to upgrade their skills periodically to keep up with the changing financial market. In Canada as in the rest of the world, there is no longer a fine line between the traditional stock broker, life insurance agent, and mutual fund agent. Each sector of the financial and related institutions are competing against each other. No longer are traditional brokers just a stock broker that buys and sells stocks. They are expected and required to provide financial planning advice, sell life insurance, mutual funds and other financial instruments. Thus, traditional, full service brokers provide a comprehensive service for investors that don't have the time to manage their finances. After all, not everyone knows how to draft up a financial plan of how to achieve financial freedom, retire comfortably, draw up an estate plan, etc. Online, discount brokers, on the other hand are probably more suitable for the investor that has the time to do some research, make his own decisions on stock picking and by doing so, save some money on broker commissions by forgoing on the financial advice, as discount brokers do not provide any financial advice on stocks. Most discount brokers do provide free research tools for the investor to do the research, although some discount brokers do provide some advice, but at a price. The discount broker is most suitable for investors that have experience in stock trading, someone who is somewhat knowledgeable on the markets, who is willing to accept responsibility for his investment decisions. This should be an investor who has taken the time to read books, newspapers, maybe even taken courses on the securities markets (like the Canadian Securities Course (in Canada) or other similar courses or seminars). A relative beginner in the securities markets should not start investing with a discount broker in hopes of saving a few stock commission dollars as he will most likely lose a lot of money without the knowledge of what he is getting himself into. Such an investor should really not even begin investing directly in the stock market but should do a bit of research on what the market is all about, and invest instead in somewhat less risky financial instruments such as CDs, GICs and even less volatile mutual funds such as money markets and balanced funds. Mutual funds are probably the first steps towards building investing experience for the beginning investor. As mutual funds are basically a portfolio of stocks managed by a professional fund manager that is based on the specific fund's investment objective (eg. a global equity fund will most likely hold a porfolio of stocks from various countries all over the world). Since the mutual fund is composed of stocks that trade on the relevant stock exchanges, the price of the mutual fund will go up or down, depending on the underlying stocks. As the mutual fund is a portfolio of stocks, the risk of investing in it is much less as the performance of the mutual fund as a whole will depend on the performance of the entire basket of stocks. Hopefully, some of the underlying stocks that fall in the fund will be offset by the gains of others. Thus, that is why mutual funds are considered as safer than investing in stocks. Aside from the features discussed above, here are some of the advantages and disadvantages of investing with the traditional, full service broker and the online, discount broker. Advantages of Traditional, Full Service broker -saves time, and hassle of learning to invest in the market -can get a peace of mind, knowing that a professional is looking after your investments -can call the broker regarding stocks, the markets, his outlook and other questions -can get free research on stocks, get special reports on industries and outlook provided by the full service brokerage house, get specific stock reports published by Valueline for free provided that the brokerage house has a subscription. -get full service on investments, research, advice and other services, especially if transferring brokerage accounts. The full service brokerage firm will do the followup on the timely transfer of money, securities -can provide graphical charts and reports of how well your portfolio is doing -can personally get to know your broker and get a real person on the other end of the line -can be one of the first people to get in on an IPO (Initial Public Offering of a stock that's to be listed and traded on a stock exchange). Although there are some online discount brokers that will provide some IPOs to their clients, a good number of IPOs are still obtained by the major full service brokerage houses (since they do a lot of the IPO underwriting (marketing, financial assistance, etc. of the securities issue)) -may get special perks from the brokerage house or broker (if you do a lot of business with him) Disadvantages of Traditional, Full service broker -during market volatility or market downturns, you may not get through to the broker due to the volume of calls -broker may not be suited to your investment risk level or personality. (eg. He may be too aggressive in investing or too conservative for you) -high broker commissions. There is a minimum set broker commission for each trade and it gets higher with the volume and amount of the trade. They can be discounted if negotiated with your broker (small consolation). -if your broker is not very trustworthy, he may "churn" your account by trading in and out of stocks without any valid reasons other than to generate commissions for himself. -may take a little longer to execute a trade since you have to first call the broker, he reads back a confirmation on the trade, writes up the trade ticket, time stamps the ticket and passes it to be data entered to be executed by the brokerage's traders. A lot of time could be spent between the time you are talking to your broker to the time the order gets executed. -if you are a small investor with a small amount of assets, you may be passed on by the broker for much wealthier clients (believe me, that happens all too often). That all comes back to concentrating on efficiently using your time. -you may be prompted to make more trades than you'd like (as the stock traders are paid on a commission basis). The newer brokers may be subsidized by a temporary salary with commissions but once they pass a certain amount of time, they will be earning by pure commissions. -regardless of the professional experience the broker has, he or she does not have a crystal ball. Think about it, if the broker is so good, why is he/she working a 9-5 day job and not investing his/her own time on his/her investments? The broker, does and will make some wrong calls. Hopefully, the good calls will outweigh the bad ones. You are paying the high commission for the analyst research of the brokerage firms, the "inside" information that you might not otherwise know as a regular investor, the expertise of the broker in handling your portfolio and your financial plan. And, yes, a lot of the "strong buy" recommendations on stocks turns out to be bad investments due to a mistake of an analyst. Yes, they do make mistakes. -sometimes, you may miss out on missed opportunities due to the number of clients that the broker has. If your broker has an extensive list of wealthy clients, he/she may call them first regarding the investment opportunity before he/she calls you. As a result, you may miss out on that opportunity if you aren't keeping yourself informed on the markets Advantages of Online, Discount Broker -you make your own decisions and accept your own responsibility for your trades -you can learn more about the interesting world of online and securities investing and may make a lot of money. -you can do your research at whatever time you want, without resorting to the typical 9-5 brokers hours. -you can make your trades quickly with the click of a mouse (although in Canada, the majority of brokers are still required by securities law to overlook your trade and compare it to your investment risk tolerance before submitting it to the exchange) -commissions are at a discount compared to the very costly full service brokerage house commissions and thus, you have the potential to gain more. -you won't have to deal with the broker unless you want to or there is a problem with your account. -you won't get passed on by your broker since you are doing the trades yourself. -you can trade as little or as much as you want and as infrequently or as frequently as you want. Compared to full service brokerage houses, if you trade shares of a stock that is less than the "board lot", which is usually 100 shares, you would usually have to pay more in brokerage commissions since it "seems" harder to find a buyer of shares less than board lot. But, with most flat rate discount brokerage firms, you pay the flat rate for 1 up to 1000 shares (depending on the firm). And the discount firms won't bother you if you haven't traded in a while, unlike full service brokers. Disadvantages of Online, Discount broker -you get no advice from your broker and you're on your own in terms of making the decision to buy or sell a stock. -you have to spend the time to research the stocks, learn about it, read newspapers, watch business news, etc. -if you want to transfer your account from one brokerage firm to another, you will be expected to do the followup of the transfer, ensuring that all your stocks from all transferring brokers get transferred, if it doesn't get processed within a specific period of time. Discount almost means no service. -you have to spend the time to keep up with your finances, your stock trades, your financial situation, and especially if you have a margin account, to make sure you are aware of potential margin calls, etc. -some discount brokers charge extra for specialty research tools while others provide some for free. -in order to calculate how well your portfolio is doing, you will have to construct your own graphs and reports, provided you have an idea of how to do so with interest compounding, etc. Overall, both traditional and online brokers provide many pros and cons. What you choose is really up to you, depending on what you're comfortable with. Many investors have both a traditional broker and an online broker so that he can get a lot of research and advice as well as trade online with discounted commissions. I, being someone who foolishly thinks I can do better than the broker, trade online (mainly due to my knowledge and experience in the securities market). But, I don't recommend it unless you know what you are doing, are able to accept responsibility for your trades and can afford to lose some money if you make a mistake. I hope that this review has helped others in the decision. Thanks again for taking the time to read and rate my review.  |
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