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The Battle Between Full-Service and Discount Commissions


The brokerage business breaks down into two basic categories: "full-service" (sometimes known as "full-commission") and "discount-commission." As you can imagine, the battle lines are drawn around the level of service and the costs of the two types of brokerages.

When you think of a stockbroker, you probably think of someone who works for one of the big-name, traditional brokerage firms. You can recognize these firms because they're usually named after people: Dean Witter, Smith Barney, Salomon Brothers, Paine Webber, and Merrill Lynch. These companies have worked hard to built up an aura of authority and respectability about their businesses, usually with lots of marble and granite logos and advertisements featuring attractive, older, successful-looking people who are meant to represent their clients.

Full-service brokers are the traditional way that Americans have invested in the stock market. Brokers have access to all sorts of information about the markets, and are trained and licensed to be able to give investment advice to the public. The companies have teams of analysts who research stocks, bonds, and mutual funds, and make recommendations for customers of the firm.

Of course, you'll pay some fairly steep commissions whenever you buy a stock, bond, or mutual fund from a full-service broker. That's the price you pay for expert advice and for the privilege of working with a broker (at least, that's the theory).

Discount brokerage firms, on the other hand, charge commissions that are a fraction of what the full-service firms charge. However, the employees at a discount brokerage firm are not allowed to provide investment advice to customers. When you have an account at a discount firm, you get cut-rate commissions (especially on the Internet), but you won't get any handholding or recommendations from the company. That's the trade-off of saving on commissions.