Online trading has helped make investing more accessible to the masses. And to capitalize on this trend, many brokerage firms are increasingly offering low-cost services that were previously reserved for wealthier individuals. Welcome to the age of the discount broker.
What does a discount broker do?
A brokerage firm acts as an intermediary between buyers and sellers, executing buy and sell orders on an exchange such as the NASDAQ or the NYSE. Brokerage firms typically charged a fee for this service. But as technology breaks barriers to entry and increases competition, most brokerage firms are forced to adapt their business models to offer commission-free trading and more.
Unlike a full-service broker, which gives clients access to perks such as personalized investment advice, wealth planning and other services, discount brokers typically operate primarily on a self-service model. This means that private investors have more control over their financial planning.
Full-service brokers versus discount brokers
By allowing investors to conduct their own research and investment management, discount brokers can eliminate overhead costs such as administrative and management fees. Often, discount brokers extend these savings to investors in the form of lower commissions.
With benefits like no minimum deposits, commission-free trading, free educational resources and more, discount brokers have leveled the playing field for novice investors.
Likewise, the Internet has democratized access to information for everyone, making it easier for retail investors to gain knowledge about stock trading, investment management and personal finance. From access to real-time quotes, company news, free investment webinars and other learning resources – all from their mobile devices – Retail investors have more power than ever before.
As a result, discount brokers are increasingly becoming platforms that provide the average investor with similar tools and information as the professionals. Along with discount brokers, new investment options such as exchange-traded funds (ETFs) and robo-advisors are helping investors diversify their assets while keeping investment costs low.
How to know if a discount broker is right for you
For most investors, the decision whether to use a discount broker depends on your financial situation, investment knowledge and goals. It’s also helpful to realistically assess whether you have the time to monitor your investments and make decisions that aren’t emotionally driven.
Many full-service brokers have asset management teams of highly specialized individuals who can recommend investment strategies that don’t apply to most middle-income families. Additionally, some full-service brokers have high minimum balance requirements depending on the investor profile they are trying to attract. As a result, many full-service brokers are simply not accessible to everyone.
On the contrary, discount brokers may offer fewer benefits. For seasoned investors active in the market, discount trading is the main draw. But retail investors can also benefit by building their portfolios through investment products such as low-cost mutual funds or ETFs, allowing them to diversify their investments and keep costs to a minimum.
Is your money safe with a discount broker?
Yes, discount brokers are a safe place to save and invest your money. Over the past few decades, discount brokers have grown into an organization that oversees vast amounts of investor assets. Charles Schwab, one of the first discount brokers, held nearly $8 trillion in client assets at the end of February 2023. Fidelity, another market leader, had about 40 million individual investors as customers at the end of 2023. These companies have grown in large numbers. partly due to the low costs and easy-to-use platforms they offer investors.
In the unlikely event that your broker fails, the Securities Investor Protection Corporation (SIPC) provides some protection. The SIPC is a private, federally mandated, nonprofit organization that covers investors up to $500,000 in securities and up to $250,000 in uninvested cash if a broker fails. You are only protected if the broker becomes insolvent and the SIPC insurance does not cover investment losses.
In short
There is no right or wrong answer when it comes to choosing a real estate agent.
Instead, individual investors should be honest about their knowledge of investing and their willingness to put time and effort into managing their investments, such as rebalancing their portfolios. And even if a full-service broker is the better choice, investors should regularly review their finances to ensure they stay on track to achieve their goals.
