Will I Go Broke With A Broker?

Buying and selling stocks has changed immensely over the last two decades and most investors now do it without a broker. These old-school intermediaries can still play a part in your financial targets but you need to keep an eye on the fees they charge you. Even the most novice investor should consider striking it out on their own eventually for the ease and cost-effectiveness of an online account.

Movie Brokers and Real Life

Stockbrokers are simply middlemen, working for large banks or investment firms.  When their clients buy or sell stocks, they get paid  a commission, in addition to a nice salary. They offer advice and access to the markets for regular investors like you and me. Regulation permits brokers to charge a commission of up to 5% whenever you make a trade.

As a child of the 80’s, I was mystified and drawn by the fast-paced life of the brokers I saw in the movies. Even when their job as a broker or trader was secondary to the storyline, I would rewind and watch their pitches over and over again.

Charlie Sheen’s character in the ’87 movie, “Wall Street”, taunts Michael Douglas with, “You once told me, don’t get emotional about a stock. Don’t! The bid is 16 ½ and going down. As your broker, I advise you to take it.”

The life of a stockbroker has never really been like those portrayed in Hollywood and the online age has largely made them dinosaurs. They can still provide good advice but online accounts like E*Trade and TD Ameritrade offer the same market access and advice at a much lower price. Most of these online brokers offer live telephone support for those still seeking personal advice.

The table below lists the pricing for a few of the most popular online investment sites.

All offer trading in the full-line of investments including: stocks, options, mutual funds, ETFs, retirement accounts and educational savings plans. Scottrade and E*Trade also offer the ability to trade stocks on a select list of international exchanges as well.

With your online account, most sites give you access to research reports from large firms like Standard & Poor’s, Credit Suisse and Morningstar. Along with this Wall Street-level analysis, the sites all have a library of seminars and videos on investor education.

Don’t just look at the lowest cost provider when picking an online account. Look over a few and see which offer the best overall package of services for your needs.

Since the online accounts charge on a per-trade basis, you will want to limit your buying and selling. For example, if you can buy $2,000 in stock every three months and make it all in one purchase then you will end up paying just 0.35% in fees (assuming a $7 trading fee). On the other hand, if you buy the same $2,000 in six purchases over the three months, you will end up paying 2.1% in fees. With a traditional broker, you could be looking at fees of up to $100 (5%) regardless of the number of times you bought or sold stock.

Whether you decide to seek the advice of a traditional broker or open an account with one of the online brokerage sites is really a matter of comfort with your own experience and ability. Those with absolutely no experience in investing and no time to learn may find it easier to seek the guidance of a broker. If you do choose to invest with a traditional broker, you should never feel pressured to buy or sell a stock. Your broker can offer sound advice but only you will be ultimately responsible for your investment returns. Before deciding to take your broker’s advice to buy or sell a stock, always consider the fees and tax consequences and always do your own research.

Those fees and commissions can add up and you may still want to consider transferring to an online account after a year or two. Spending just a couple of hours a month learning about investing will bring you up to speed fast enough that you’ll feel confident in being your own broker in no time.