What's Wrong With Full-Service Brokers?

Here at The Motley Fool, we have a pretty set opinion of whether you should use a full-service broker or a discount broker (if you didn't already gather that from the title of this area). We favor the discount brokers, who execute trades for about one-twentieth (yes, you read that right) the amount that full-service brokers often charge.

Where discount brokers typically charge between $5 and $20 for an individual online trade, you'll probably pay around $150 for the average trade done through the typical full-service (really, "full-price") 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 expensively dressed souls who work for Merrill Lynch, Salomon Smith Barney, Morgan Stanley Dean Witter and others? We don't think so. Most brokers who give advice are just glorified salesmen, shopping around their brokerage house's stock picks or pricey mutual funds. Why shouldn't 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's 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.

If you're fascinated by the high-rolling world of full-priced brokers, we go into more detail in Step 6 of our "13 Steps to Investing Foolishly." And for the scuttlebutt directly from a former broker, read "V's" first-person account (shudder) of his days as a broker for a large national firm.