Full-service vs. discount broker — what's the difference?
With a full-service broker, you get the whole package. Someone else manages your investment portfolio for you, making moves on your behalf. In the past, full-service brokers were the only option, and they could cost a lot for each transaction.
But today, full-service brokers cost a lot less. However, they still give you investment advice and guidance and manage your portfolio on your behalf. Expect to pay for management expenses based on how much money you have in the account. In general, full-service brokers charge between 1% and 2% of your assets under management.
Another thing to keep in mind is that many full-service brokers require account minimums. You may need to have $100,000 or $250,000 in assets if you want to work with a full-service brokerage. While some full-service brokers do offer services to those with fewer assets, the relative cost could actually be higher.
On the other hand, discount brokers provide you with the opportunity to do much of the heavy lifting on your own. You get access to online trading platforms that allow you to make your own investing choices. They may even have helpful tools, such as stock screeners, to help you decide what works best for you. As long as you understand how to use the tools, you may be able to do very well on your own.
Discount brokers give only limited general guidance, but the commissions are much lower. You can save a lot of money on fees with a discount broker.
When to consider a discount broker
Discount brokers are ideal for helping you out if you don't have a lot of money up front or you like being personally involved in your investment decisions.
Here are some of the characteristics of someone who could benefit from using a discount broker:
- Prefers control: With a discount broker, you're entirely in charge of your portfolio. You decide what to buy and sell — and when. You set your investment strategy and are responsible for carrying it out. If you like to be personally involved in your portfolio, a discount broker can make sense.
- Comfortable with technology: Many discount brokers have proprietary trading platforms that they use. You need to feel comfortable learning new platforms and using them to trade.
- Don't have a lot of money: Many discount brokers have $0 account minimums and will allow you to start trading with as little $25. You may be able to buy fractional shares and get started even though you don't have a lot of money. Plus, the commissions are low, so your returns aren't being as impacted by fees.
- Confident in your ability to analyze information: Finally, if you're confident in your ability to analyze information and make good decisions, a discount broker can be a good choice. You can also use a discount broker if you're comfortable with the idea of making mistakes while you learn.
With a discount broker, you'll have a lot more options and be in charge of what comes next. If that idea appeals to you — or you just need a cheap place to start building your portfolio — a discount broker could be the right choice for you.
When to consider a full-service broker
On the other hand, you may feel better about having a professional in charge of your portfolio. And there are some other perks that may come with using a full-service broker.
Here are some traits that could make a full-service broker a better choice for you:
- You're uncomfortable with the idea of managing your own investments. For many people, the idea of investing is so scary they don't want to manage a portfolio. If you're going to be under a lot of stress, it can make sense to turn it over to the professionals at a full-service brokerage.
- You don't have the time to manage your portfolio. There's a reason so many wealthy and successful people don't manage their own investments. They don't have the time. Being personally involved can take up a lot of time. If you want to use your time for something other than portfolio management, a full-service brokerage can be a big help.
- You have enough money to make it worthwhile. Some full-service brokers offer discounts when you have a certain amount of assets. If you can qualify for that discount, it can make your investment costs a little more manageable.
Some full-service brokers require asset minimums. Use a robo-advisor if you can't meet the minimum and you're not comfortable managing your own portfolio. Robo advisors have much lower account minimums, so you don't have to worry about having a lot of wealth already.
A robo-advisor will take some of the stress out of portfolio management and do so without costing you an arm and a leg.
Where do robo-advisors fit?
Robo advisors are a sort of hybrid option between full-service and discount brokers. With a robo advisor, you get some of the qualities of a full-service broker, such as automatic management of your assets. The management is often taken care of with the help of an algorithm and based on general principles, rather than a truly tailored individual strategy.
You don't have to deal with management on your own when you use a robo advisor. Plus, you get access to a discounted fee. Often, you can get robo-advisor help at a rate that's lower than you'd pay at a full-service broker.
This can be a reasonable option if you're looking for a way to “set it and forget it” without paying a huge management fee and if you aren't too fussy about personalizing your investment portfolio.
| Robo-advisor | Minimum Investment and fees | Rating | |
|---|---|---|---|
| Wealthfront | Minimum investment: $500 Fees range: 0.25%- 22.3% | 9/10 | |
| Empower | Minimum investment: $100,000 Fees range: 0%- 0.89% | 9.5/10 | |
| Betterment | Minimum investment: $10 Fees range: 0.25%- 0.40% | 9/10 | |
| M1 | Minimum investment: $0 Fees range: 0%- 0% | 8.5/10 | |
| Ally invest | Minimum investment: $100 Fees range: 0.00%- 0.30% | 8/10 | |
| SoFi | Minimum investment: $1 Fees range: 0%- 0.25% | 8/10 | |
| Openinvest | Minimum investment: $100 Fees range: 0.5%- 0.72% | 8/10 | |
| MEGI | Minimum investment: $1,000 Fees range: 0.45%- 1.85% | 8/10 | |
| Vanguard Personal Advisor Services | Minimum investment: $50,000 Fees range: 0.30%- 0.30% | 8/10 | |
| Future Advisor | Minimum investment: $10,000 Fees range: 0.50%- 0.50% | 7/10 | |
| Axos Invest | Minimum investment: $1 Fees range: 0%- 0% | 8.5/10 | |
| E*Trade Core Portfolios | Minimum investment: $500 Fees range: 0.30%- 0.30% | 7.5/10 | |
| Market Riders | Minimum investment: $1,000 Fees range: 0.25%- 0.45% | 7/10 | |
| SigFig | Minimum investment: $2,000 Fees range: 0.00%- 0.50% | 7/10 | |
| Rebalance IRA | Minimum investment: $100,000 Fees range: 0.50%- 0.50% | 6/10 |
The bottom line
Whether you choose a full-service or discount broker, you'll probably be able to meet your long-term financial goals. Even using a robo advisor can help you along the way.
In the end, what you choose depends largely on your personal situation and investing style. For those who enjoy a hands-on approach and have the time to devote to investment decisions, a discount broker can be the ideal choice. You're firmly in the driver's seat and it can be thrilling to be so involved.
But a full-service broker can be the right choice if your investing style is more hands-off. It's also a good choice if you're just interested in getting help meeting some long-term goals and don't want to be bothered with the details — or don't have the time to build and maintain a portfolio. If you have the assets to qualify for an account, it can be a relief to let someone else handle it.
Carefully think about the realities of your financial situation and make a choice that's likely to help you make the most of your time and money in the long run.
