Full-service brokers come up with plenty of investment ideas, not all worthy extra costs and/or risks
In the old days, investors did business via personal visits to a broker’s office or by calling. Full-service brokerage houses still exist today. These businesses charge high commissions for advice given by personal stockbrokers. On the other hand, there are online brokerage accounts where no personal advice is given (although many online brokers provide standard research reports and, at times, their own analysts’ recommendations). These accounts are easy to make transactions with and cost effective.
So, many investors ask: What is the value added by full-service brokers? It’s hard to say. There are competent brokers who offer good advice, but not all of them. Keep in mind: Full-service stockbrokers are, above all, salespeople. They get paid commissions no matter what happens to investments recommended. An investor needs to pay commissions when buying and selling. Some houses also charge fees based on assets under management.
Of course, only satisfied customers stay with a broker or a financial advisor. However, there is a way to prolong relationships with clients when investments recommended perform poorly. Brokers and all kinds of advisors like to say something like “this stock is for the long run, don’t get nervous over its fluctuations, it’s normal and blah-blah-blah.”
This is an interesting strategy as it offers advisors a couple of options. First, the stock may rise and, second, if it doesn’t, it may take some time before disgruntled customer leaves.
Full-service brokerage accounts are old-fashioned investment accounts that have been going out of fashion for some time.
As Abraham Lincoln said, “you can fool all people some of the time, some people all the time, but you can’t fool all the people all the time.” Some people all the time equals good profit. Similarly, all people some of the time also means good profit.
It’s not that all brokers are bad, but that the investors need to question what these brokers say, what’s the value added, and whether it’s worth to continue the relationship, or to seek cheaper alternatives such as investing in Index Funds and ETFs.
There are also Discount Brokers who charge lower fees than full-service houses, while offering limited investment advice, often pertaining to fixed-income products or fund investments.
Investors need to be especially careful when someone is attempting to sell questionable investments (i.e. $5 stock of a new company that is supposed to go up to $100) via a phone call. These calls come from the so-called “boiler rooms,” which often use dishonest tactics and high sales pressure.
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