Now that we have looked at discount brokerage firms and no load mutual funds, let’s take a look at how full service brokerage firms work. Full service brokerage firms offer a wide variety of services including buying and selling stocks, bonds, options, mutual funds and money market accounts. In addition, they usually offer life insurance and long term care insurance. As the financial services industry has evolved many full service brokerage firms have started offering banking services such as check writing, debit cards, credit cards and mortgages. Some well known full service brokerage firms are Edward Jones, Merrill Lynch, and Smith Barney.
The most fundamental difference between a discount brokerage firm and a full service brokerage firm is indicated by the name. A full service brokerage firm should offer excellent service. This service is usually provided by a local representative who can explain to you the different investment options that are available to you, answer questions regarding your investment returns and fees, and generally help guide you in the investment process.
One thing that is important to note is that a stock broker (registered representative or RR is the official title) is charged with the duty of selling investments for a fee. A RR’s job is not to make sure that you are purchasing the right investment for your situation any more than it is the supermarket employee’s responsibility to make sure that you are purchasing the “right” kind of cereal. The employee at the supermarket can tell you what kinds of cereal they offer, if there is more in stock in the back, what the price is, and can direct you to the nutrition information on the box, but it is not their responsibility to determine which cereal is right for you. Likewise, a stock broker can tell you what investments are available, what the price is, what the historical performance has been, and how each investment works, but it is not their job, technically speaking, to tell you which investment is right for you. Having said that, there are many RRs that will go above and beyond, learn more about your situation, and make recommendations that they believe are appropriate for you. The challenge is that there is a conflict of interest because the stock broker gets paid by making transactions, not by investing your money in a way that is best for you.
If you are looking for someone that is responsible for investing your money in a way that keeps your best interest at the forefront, then what you are looking for is an investment advisor representative (IAR). To make things more confusing most full service brokerage firms have agents that act as both RRs and IARs, though they can only act in one capacity at a time. If you choose to work with a full service brokerage firm, make sure you ask your advisor what capacity he or she is working in.
For now, let’s take away the important ideas about how a full service brokerage firm works. A full service brokerage firm offers a wide array of investments and other financial services. When they are acting in a brokerage capacity they will offer these investments for a commission. One of the greatest benefits is the service. You will usually deal directly with one local person who will answer all of your questions.
That is a broad overview of full service brokerage firms. Next week we will look at how an IAR works. And whatever you do, if you still don’t understand how it all works, ask someone that knows before making any decisions that you will regret later.
Jeff Hupman is a financial advisor with Christian Values Investing. You may reach him at 748-9321.
