Most traders, at one time or another, have to address the question of whether to use discount or full-service brokers. This commentary (special thanks to Maria DuBose for submitting) discusses the merits of going full-service. We don’t have any access to research proving or disproving the author’s viewpoint, so I encourage you to form your own opinions.
Personally, though, I agree wholeheartedly that full-service is worth the expense. As a broker, I can remember a number of times that being able to devote personal attention to a client has helped them avoid costly trading mistakes.
However, the choice is completely up to the client, and we are happy to be able to offer both full-service and self-directed (discounted) accounts to suit anyone’s individual needs. We make it a policy never to pressure potential clients to choose the full-service option. For more about available types of trading accounts: Types of Trading Accounts.
~ Edgar Paredes
paredes@californiacapitaltradinggroup.com
Why Discount Brokers Can Cost You Money
(Author Unknown)
For the sake of discussion, let’s assume that both types of brokers are top-of-the-line, are able to offer and obtain equally good dills on orders, and that the only difference between the two is that the full-service broker provides additional services including, but not limited to, calling you if important events occur, watching the options markets, sending out free literature and commentary, working your orders to obtain the best possible fills, etc.
My conclusion, after studying this topic for several years, is clear: Discount brokers can actually cost you a substantial amount of money in the long run in most cases.
The first area I’ve found a significant difference in is that full-service brokers greatly eliminate the potential for errors in trading. Errors can be costly and damaging, both financially and emotionally. My professional-trader associates and I have found that even with the utmost care, we attempt to enter an erroneous order on the average of at least twice a month. Due to the competence of the people I work with, however, I find that 90% of these “bad” orders are discovered before they’re entered, and the remaining have always been discovered before any substantial loss has occurred.
In contrast, most discount firms do not check the price levels of the markets before placing an order. Therefore, if you enter an order stating a “March” contract, but really mean “July,” where the price levels are similar, this mistake is unlikely to be discovered and probably will be filled as a market order at an unfavorable price to you. Even worse is when I say “buy” meaning “sell” and visa versa. Working with the brokers I do, however, even these potential errors are normally caught because of their familiarity with my type of trading and because they repeat every order back to me at least once. Also, to help prevent errors that can be remedied even after the markets’ close, I review my trades with my broker after the close to make certain I know all my fills and that no errors have been made.
Another area in which full-service brokers can be of great assistance is in obtaining better prices on your orders. This is especially evident in the options market which is much less liquid that the futures market. A knowledgeable options broker can tell you the probable range of the option you wish to trade, based on the current action of the futures market. This fact alone should save you far more than the extra commission expense alone.
Interesting, I’ve found that most of the full-time, professional traders I know don’t even use discount brokers; rather, they place their own orders directly with the various exchanges’ floor brokers.
Finally, I like to feel that when I’m trading I have someone on my side. I’ve found that discount brokers do not have the time to give special treatment to any one client. Most of the time this type of treatment is not necessary, but when it is, no reasonable price is too much to pay.
Ultimately, of course, it’s your choice. When making your decision, however, please keep the issues raised here in mind. And—in all your trading—check and double-check every single order you place.
