What do stock broker do ?

Using the wrong broker could cost you serious money

Over the long term, there’s been no better way to grow your wealth than investing in the stock market. But using the wrong broker could make a big dent in your investing returns.

What do stock broker do ?

Discount brokers: Do-it-yourself stockbrokers

More and more investors are choosing to manage their portfolios on their own by using online discount brokers to minimize the cost of investing and maximize the choices available to them. The big advantage of an online discount broker is that they are downright cheap. Whereas a traditional broker-dealer might charge you $100 for a stock trade, virtually all discount brokers charge $7 or less for that basic service.

There are three things that define a discount brokerage service:

Low prices — A discount broker offers an inexpensive line straight to Wall Street. If you know you want to buy 100 shares of Apple or invest $10,000 into a mutual fund, there is often no cheaper way to do it than by using a discount broker. Most discount brokers charge a commission of less than $7 to buy or sell a stock. Old-school stockbrokers can charge commissions of $100 or more for the same trade.

No advice — A discount broker is unlikely to phone you up about a hot stock tip, or tell you which funds you should invest in. Instead, discount brokers offer research on stocks and funds from independent research firms to their clients. For example, if you have a Fidelity brokerage account, you get access to research reports from several different research houses, which you can use to make an informed decision on whether to buy or sell a stock.

No (or few) humans — Discount brokers are designed to be used electronically and actively discourage their clients from talking to a human for a service. For example, many brokers charge you $7 or less to place a trade online through your account. However, if you phone up your broker to make the trade — something very few people ever do — the commission might be as high as $30 or $50.

Even as a discount brokerage customer and a proponent of DIY investing, I’m willing to admit they aren’t for everyone. Many people prefer a real human to help craft a retirement plan and build a thoughtful investment portfolio for them.

Guidance from a broker-dealer or RIA can be especially helpful for people who have complicated financial lives — multiple business interests, large amounts of money, complicated trusts to pass wealth on to family members, and so on. Those complexities make it easier to justify hiring the services of a full-service brokerage or RIA.

But for the average person who just wants to open an IRA to start saving for retirement, a discount broker is hard to beat, especially for people who are just getting started. Whereas most RIAs have six-figure minimums to hire their services, discount brokers allow you to get started with as little as $1. If you’re thinking of starting to invest, check out our resources on the best online stock brokers for beginners to learn which may be best for you.

Naturally, many people start saving with a discount broker in their younger years, and later, if they want personalized help as they near retirement, they move to an RIA or other full-service financial planner. For obvious reasons, it doesn’t make sense to hire an expert for $250 an hour if you only have $5,000 to invest. On small amounts of money, minimizing expenses is arguably the most important thing you can do to improve your investment performance.

What do stock broker do ?

Registered investment advisors (RIAs): the new “stockbrokers”

The traditional stockbroker role is disappearing, as old-school brokers are getting replaced by a growing number of “registered investment advisors,” or RIAs. A registered investment advisor is not a salesman and is generally held to a higher standard when selling investment products to investors than a broker-dealer.

RIAs are generally in the business of selling advice, not financial products. People typically hire RIAs on a flat fee as a percentage of their wealth each year, or simply on an hourly basis, to help them make informed decisions about how to invest their money.

These are the defining elements of a registered investment advisor.Asset-based compensation — Registered investment advisors are typically compensated in the form of an asset management fee. If you hire an RIA to manage a $250,000 investment portfolio for you, they might charge you 1% per year in asset management fees as their only compensation for the service. According to one 2018 study of RIAs, the average charged a fee of 0.95% of assets each year.

Fewer conflicts of interest — Because you pay an RIA a fee to manage your money, there are fewer conflicts of interest about what financial products they recommend to you. An RIA also has what’s known as a “fiduciary duty” to put your interests above their own, which means they are obligated to help you find good investments, and cannot legally put their interests above yours. This is a clear differentiator between RIAs and broker-dealers (traditional stockbrokers).

On-going relationship — Hiring the services of an RIA is rarely a one-off transaction. Though you might buy an annuity from a stockbroker and then never or rarely speak to them again, most RIA practices are structured to provide continued support over time.

Pay attention to how an RIA advertises its services. A “fee-only” advisor is one who is only compensated in the form of fees you pay them directly. Advisors who advertise themselves as “fee-based” advisors can and do make their money from fees they charge clients, but they can also collect commissions for selling certain financial clients.

What do stock broker do ?

Stockbrokers are financial salesman

There’s no way around it: The primary job of a stockbroker is to… well, act as the broker for the sale of stocks and other investments. A stockbroker works on behalf of an investment firm, generally earning a commission for selling stocks, bonds, and mutual funds to investors. (Stockbrokers who work at broker-dealers can and often do have the title “financial advisor” rather than “broker” or “stockbroker.”)

A stockbroker is to a broker-dealer what a broker or agent is to an insurance company. Just as you wouldn’t expect an insurance agent to send you to GEICO (GEICO doesn’t pay agents commissions like other insurance companies do), you shouldn’t expect a stockbroker at a broker-dealer to sell you a full range of products from other investment companies, either.

In that sense, the stockbroker’s most important job is to find people who have money to invest and convince them to buy the products he or she is selling.Commission-based compensation — Stockbrokers are generally compensated on commission, which means they earn money upfront when you buy or sell a specific type of investment. This contrasts with registered investment advisors, who generally charge clients a fee based on the amount they manage on the client’s behalf.

Conflicts of interest — Old-school stockbrokers work for a broker-dealer, which are subject to less onerous rules about the financial products they can sell to their customers. A broker-dealer can sell financial products to a customer so long as they are deemed to be “suitable” for the investor. A broker is not obligated to act in your best interest and may legally steer you toward products that generate higher commissions for himself and his firm.

Transactional relationship — A traditional broker generally has a transactional relationship with his or her clients. You might use a stockbroker to buy shares of stock or a fund, but you might not consult with them about all your investments (like a 401(k) that you have with your employer).

Commissions and conflicts are the hallmark of the traditional broker-dealer, and it’s one reason why stockbrokers are slowly disappearing. Though you can get a fair deal from a stockbroker, the reality is that they are paid on commission and typically sell just one company’s products, just like any other salesperson.

Sometimes, the commissions you pay a broker are clear and obvious. For example, if your broker charges $50 to place a stock trade — many brick-and-mortar brokers can charge even more than that — then you know you’ll pay $50 on top of what you pay for the stock.

Some commissions are less obvious. For example, some mutual funds carry what’s known as a sales load, which is deducted from the amount you invest to pay commissions. In an extreme case, you might decide to put $10,000 into a mutual fund recommended by your broker, of which $525 is deducted and paid to the brokerage firm, and $9,475 is put into the fund. Of course, there are many no-load funds out there, but brokers have financial incentives to sell funds with loads because they make more money doing it.