Looking at pros and cons of using discount brokers. Many offer more than just cut rates; diversity calls for shopping around
No matter how much money one has, an individual investor cannot actually buy a share of stock at a stock exchange; only a broker can do that. But how much money one spends to have brokers perform this chore is something individuals can control -- and more are choosing to control these costs in a downward direction. Although 1984 was a bad year for virtually everyone in the brokerage business, including discount brokers, the discounters continued to show growth in their share of the overall market, says Mark D. Coler, president of Discount Brokerage Advisory Services in New York.
Within the discount business, the biggest area of growth was at banks and savings-and-loans.
Between September 1983 and the following April, Mr. Coler says, brokerage services offered at thousands of banks and savings-and-loans doubled their customer base, raising the total to more than half a million investors.
While the savings at discount brokers can be substantial -- as much as 70 percent on some trades -- Coler recommends that investors not open accounts with just any discounter. In fact, investors should consider whether their trading patterns are suitable for a discount broker at all.
Even though he and Ellis M. Ratner, executive vice-president of the firm, have written a book extolling the virtues of discount brokers, ``70% Off! The Investor's Guide to Discount Brokerage'' (Facts on File, New York, $24.95), Coler believes there is a place for full-commission brokers.
In general, he says, there are two main categories of discount brokers. The more common form is what he calls ``valuebrokers.'' These are the firms that base their commissions on the dollar value of the trade. The other category is known as ``sharebrokers,'' who base commissions on the number of shares in the transaction.
Valuebrokers include Fidelity/Source in Boston, and Charles Schwab & Co., of San Francisco, a subsidiary of Bank of America. Sharebrokers include Kennedy, Cabot & Co., Beverly Hills, Calif., and the Wall Street Discount Corporation, New York. There are also firms that are a combination of valuebroker and sharebroker, such as Quick & Reilly Inc.
Investors who like to play with mostly lower-priced stocks, where the dollar values are lower but the number of shares purchased may be larger, will do better with a valuebroker.
People who prefer the better-known high-priced stocks will probably prefer sharebrokers, particularly if they are not buying so many shares. Coler does not have a firm cutoff point for either category, but he says that if most of the stocks you buy sell for $35 to $40 a share or more, then you are probably a candidate for a sharebroker.
There are, of course, investors who like to dabble in both types of stocks; they should consider opening accounts at both types of brokerages. Then, if you're not sure what the cost of a particular trade will be, a couple of phone calls will provide a quick comparison.
There are times, however, when the advantages of a discounter over a full-commission broker are so small as to be meaningless. At such times, a full-service broker may be better.
An example is over-the-counter (OTC) stocks. Here, instead of a commission, you pay a ``markup'' for each share purchased. The markup might be 25 cents a share, for example. Markups can vary among discount and full-service brokers, so some checking is called for.
Beyond this, though, is the fact that some large, full- commission brokers ``make a market'' in an OTC stock, meaning they have the stock in their portfolio, from where they sell it to their customers. If this is the case, the brokerage may sell the stock to you at the ``inside'' price, which it would impose if it sold the stock to another broker.
So if every broker has to pay this price, you're getting the best possible deal and will probably do better with the full-commission firm.
For the most part, Coler says, there is no difference in the quality of service and handling of paper work offered by discount brokers and their full-commission competitors, although ``on a case-by-case basis,'' you can find some in each camp who perform below par. Also, virtually all brokerages are members of the Securities Investor Protection Corporation (SIPC) and are thus able to offer $500,000 of account insurance. There may be a few firms ``here and there'' that are not SIPC members and are working under state laws, he says, but since so many are in SIPC, it seems best to stick with those that are.
A growing number of discounters, including those situated in bank offices, are offering a full range of additional services. You can, for instance, open an individual retirement account, buy a tax shelter, start an annuity, invest in municipal bonds, or keep an asset-management account. This last service gets broadened somewhat at bank-brokerages because of the ability to shift investment money in and out of bank accounts. The range of these additional services offered by discounters and full-service brokers varies widely, so you'll have to ask for a menu.
Despite his preference for discounters, Coler sees a few reasons for favoring full-commission brokers. If your full-commission broker is making such good recommendations that you've profited handsomely, the higher commission is worth it. Also, if you trade infrequently or your trades are small, it may not be worth the bother of switching, particularly if your full-commission broker's office is close to your home or office. If it is that close, you may like the ease of getting occasional face-to-face advice about your investments.
If you would like a question considered for publication in this column, please send it to Moneywise, The Christian Science Monitor, One Norway Street, Boston, Mass. 02115. No personal replies can be given by mail or phone. References to investments are not an endorsement or recommendation by this newspaper.