But surprisingly enough, experts say, most full-service brokers are behind the technological curve; their websites lack features that are standard
A full-service broker is a licensed financial broker-dealer firm that provides a large variety of services to its clients, including research and advice, retirement planning, tax tips, and much more. Of course, this all comes at a price, as commissions at full-service brokerages are much higher than those at discount brokers.
Full-service brokers can provide expertise for people who don't have the time to stay up-to-date on complicated issues such as tax or estate planning; however for those who just want to execute trades without the extra services, discount brokers are the way to go.
BREAKING DOWN 'Full-Service Broker'
Full-service brokers offer customized support and interaction in facilitating trades, managing portfolios, financial planning and wealth management services for clients. Clients are assigned to individual stockbrokers and/or financial advisors. They are the main point of contact at a full-service brokerage firm.
Stockbrokers and Financial Advisors
Stockbrokers are licensed professionals who manage client investments and administer financial advice to clients, and they are required to pass the Series 7, Series 63 and Series 65 exams to attain licensing. Brokers working at financial firms also need to be registered with the Financial Industry Regulatory Authority (FINRA). Licensed stock brokers are expected to be fluent in stocks, bonds and options.
It is important to distinguish between a stockbroker and a financial advisor. Stockbrokers are more geared towards providing securities products and transaction-based services, whereas financial advisors cover a broader range of services that include estate planning, financial planning and budgeting, insurance products and even tax advice.
Additional Benefits of Full Service
Full-service firms have large research departments with analysts that provide proprietary detailed reports and recommendations for clients. They also have investment banking divisions that may provide certain accredited investor clients access to special financial products such as initial public offerings (IPOs), senior notes, preferred stock, debt instruments, limited partnerships and various exotic and alternate investment opportunities. This is one of the main advantages of full-service firms. Full-service brokers often have their own in-house line of products like mutual funds, portfolio management, insurance, loan services and exchange-traded funds (ETFs). All full-service brokerages provide physical office locations for clients to visit.
Clients of full-service brokerages appreciated the convenience of having a personal broker handle all their investment needs. It is a one-stop shop for investment and financial management. Most full-services firms provide online access and trading platforms. Self-directed investors tend to take advantage of these offerings. These platforms are loaded with fundamental research, order execution and technical analysis tools.
Nominee
A nominee is a person or firm into whose name securities or other properties are transferred to facilitate transactions, while leaving the customer as the actual owner. A nominee account is a type of account in which a stockbroker holds shares belonging to clients, making buying and selling those shares easier. In such an arrangement, shares are said to be held in street name.
BREAKING DOWN 'Nominee'
Nominee accounts are the most common method for holding stocks. Stockbrokers prefer nominee accounts because they cut costs and increase trading efficiency.
How a Nominee Account Works
An investor's shares are legally owned by a stockbroker's non-trading subsidiary, or nominee company. The investor is the stock's beneficial owner and has rights over the shares. The stockbroker records all beneficial owners, trades according to an investor's directions, and passes cash from sales or dividends to an investor.
Because a non-trading company owns the shares, an investor's assets are legally separate from the stockbroker's assets and liabilities. If the broker becomes insolvent, the investor's stocks are protected from creditors.
Nominee Accounts and Safety
Although regulators and exchanges periodically check up on nominee accounts' holdings, the process is not performed on a daily basis. Because a stockbroker may move or sell shares from nominee accounts at any time, fraud may occur. This is especially common if a firm is facing insolvency and needs cash or assets to meet liabilities. A stockbroker's records may become altered, increasing the difficulty of determining which investors own assets in a nominee account.
Nominee Accounts and Investor Compensation
Most major markets offer investor compensation, covering assets held by a stockbroker. Investors are compensated up to a set amount if assets are missing from their accounts and the broker cannot offer the difference in cash. Investors with larger stock values are encouraged to have accounts with multiple brokers. It is unlikely all the brokers will fail at the same time, and the investor is entitled to more compensation than if he held a nominee account with one broker.
Nominee Accounts and Foreign Stocks
A stockbroker typically does not take direct custody of an investor's foreign securities. The broker uses a third-party custodian, typically a division of a major global bank offering such services. However, some international brokers have local subsidiaries handling custody in some or all of their markets.
Assets the bank holds in custody are segregated from general operations. Although it is possible the global bank may fail, the far-reaching consequences would most likely result in a bailout, protecting the investors' asset values. However, in smaller emerging markets, a custodian without a local division may engage a sub-custodian to hold stock on its behalf. If the sub-custodian faces insolvency, the main custodian may not be liable for the sub-custodian's missing assets.
Series 14
An exam administered by the Financial Industry Regulatory Authority (FINRA) for professionals seeking to become licensed compliance officers for a member firm. Anyone who seeks employment as a head compliance officer or who will be managing more than 10 compliance officers must complete the exam.
The exam consists of 100 questions, and three hours is provided for its completion. A score of 70% or better is required for passing.
BREAKING DOWN 'Series 14'
Exam topics include the various industry regulatory agencies, the supervision of sales and customer accounts, the operation of both primary and secondary trading markets, and financial responsibilities for FINRA and NYSE-member firms.
The Series 14 is a comprehensive and difficult exam along the lines of the Series 7 for general securities brokers. Compliance officers are responsible for making sure that firms are obeying the regulations that keep customer accounts safe, employees in good standing with regulatory authorities, and otherwise following the rules that keep the doors to the
Brokerage Account
A brokerage account is an arrangement between an investor and a licensed brokerage firm that allows the investor to deposit funds with the firm and place investment orders through the brokerage. The investor owns the assets contained in the brokerage account and must usually claim as income any capital gains he incurs from the account.
BREAKING DOWN 'Brokerage Account'
There are several different types of brokerage accounts and brokerage firms; investors can choose the type of brokerage account and broker that best suits their financial requirements. Some full-service brokers provide extensive investment advice, charging high fees for their efforts. Most online brokers simply provide a secure interface through which investors can place trade orders and charge relatively low fees for their services. Brokerage accounts can also differ in terms of order execution speed, analysis tools used, scope of tradable assets and the extent to which investors can trade on margin.
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Full-Service Brokerage Accounts
Investors seeking the expertise of a financial advisor should look to the services that are provided by a full-service brokerage firm. The most well-known full-service firms are Merrill Lynch, Morgan Stanley, Wells Fargo Advisors and UBS. Financial advisors are paid to help their clients develop investment plans and execute the transactions accordingly. Financial advisors can work on either a non-discretionary basis, where the client must approve any transaction, or on a discretionary basis where client approval is not needed.
Full-service brokerage accounts have two types of fee structures, either on a commission or advisory fee basis. A commission account generates a fee anytime an investment is bought or sold, regardless if it was the recommendation of the client or advisor. Advisory fee based accounts have a flat annual fee, ranging from 0.5% to 1.5% on the total account balance. In exchange for the fee, no commissions are charged when investments are bought or sold. Investors should determine the most cost effective option by discussing it with the financial advisor at the start of the relationship.
Discount Brokerage Account
Investors looking for the do-it-yourself brokerage option may be interested in using discount brokerage firms. These firms have significantly lower costs than full-service brokerage firms. However, like the name suggests, a discount brokerage firm offers fewer services in exchange for lower fees. Firms like Scottrade, E*Trade, Vanguard and Fidelity are examples of the most popular firms that offer these services. Investors can complete low-cost investment trades using easy-to-use trading online software coupled with research and analysis.
For example, as of 2016, an investor who signs up with E*Trade could open a regular taxable brokerage account or retirement account at no cost at a minimum of $500. To buy or sell a stock, option or ETF, the commission would be $9.99 per trade. Treasury bonds are $0 per trade and secondary bonds are bought at $1 per bond (with a minimum of $10). E*Trade also offers a variety of institutional no-load mutual funds for $0 per transaction
Series 62
An exam administered by the Financial Industry Regulatory Authority (FINRA) for financial professionals seeking to become limited registered representatives for corporate equities and corporate debt securities. It tests an individual's knowledge of corporate equity and bond markets, security analysis and characteristics, industry regulations, and the handling of customer accounts.
The test consists of 115 questions taken over 150 minutes. A score of 70% or better is required for passing.
BREAKING DOWN 'Series 62'
The Series 62 is more limited in scope than the Series 7 exam; licensed limited registered representatives can trade in equities, corporate bonds, preferred stocks and some asset-backed securities. They cannot trade in funds registered under the Investment Company Act of 1940, such as open- and closed-end mutual funds.
Registered Representative - RR
A Registered Representative (RR) is a person who works for a brokerage company that is licensed by the Securities and Exchange Commission (SEC) and acts as an account executive for clients trading investment products such as stocks, bonds and mutual funds.
Also known as an "account executive".
BREAKING DOWN 'Registered Representative - RR'
To become licensed as a Registered Representative to act as agent in the buying and selling of securities, a person must pass the Series 7 and Series 63 securities examinations, and be registered with a member of the Financial Industry Regulatory Authority (FINRA) or a self-regulatory organization (SRO).
Firm Order
1. A market order to buy or sell a security for a brokerage's proprietary account. A firm order requires a trader to be fully authorized by the brokerage before executing the transaction.
2. A buy or sell order executed by a broker for a client's account. This is not contingent on the customer's confirmation.
BREAKING DOWN 'Firm Order'
1. A firm order is made for the brokerage's equity portfolio and is held in the firm's trading account. Shares purchased under a firm order are held directly by the brokerage.
2. Full trading authorization is typically required for a broker to execute a transaction on behalf of a client without first confirming the order. This type of trade allows a client to benefit from any timely knowledge the broker may have.
Brokerage Company
A brokerage company’s main duty is to be a middleman that connects buyers and sellers to facilitate a transaction. Brokerage companies receive compensation by means of commission once the transaction has successfully completed. For example, when a trade order for a stock is executed, an investor pays a transaction fee for the brokerage company's efforts to complete the trade.
BREAKING DOWN 'Brokerage Company'
The real estate industry also functions using a brokerage company format as it is customary for real estate brokers to collaborate, each company representing one party of the transaction to make a sale. In this case, both brokerage companies divide the commission.
Choosing a Company
A brokerage company is also called a brokerage. Investors have a range of options when choosing a company to work with. An investment brokerage is authorized to trade securities for buyers and sellers.
Brokerage commissions erode returns, so investors should select a company that provides economical fees. Before opening an investment account, do research and compare fees, products, benefits, customer service, reputation and the quality of services provided.
Full-Service Brokerage
Full-service brokerages are also known as traditional brokerages. These companies offer estate planning services, tax advice and consultations. These companies also offer up-to-date stock prices, quotes, and research on economic conditions and market analysis.
Traditional brokerages charge a fee, commission or both. For example, a brokerage may charge a load fee up to 5.75% for mutual funds. Broker commissions average about 2%. In addition, brokers sell their clients’ additional products to earn supplementary fees.
Discount Brokerage
A discount brokerage typically charges less than a traditional brokerage. Several companies also offer advice at a lower cost. However, the depth of the advice depends on the size of an investor’s account. These types of companies charge a lower commission by having their clients conduct trades via computerized trading systems.
These companies may do business over the phone or on the Internet. These companies charge a minimum commission of $5 up to a higher rate of $45 for a broker assisted trade. Clients can wire money to their account and access tax documents.
Online Brokerage
Online brokerages only offer a website for investors to conduct transactions on their own. Clients can communicate by email or phone to conduct trades or ask questions. These companies offer their services at a discounted rate because they don't offer investment advice.
Captive Brokerage
Captive brokerages are affiliated with a specific mutual fund company. Captive brokers are biased and are persuaded to recommend and sell mutual funds that the mutual company owns. As a result, brokers may sell client’s products that are not in their best interest.
Independent Brokerage
Independent brokerages are not affiliated with any mutual fund company. They function similarly to a full-service brokerage. Typically, these brokers are not biased and can recommend and sell client’s products that are in their best interest
Choosing between a full-service or discount broker is an important decision for investors. Should you go with the straightforward, cost-effective ...
In contrast to a discount broker, who only executes trades for customers, a full-service broker also provides service and expertise in wealth management