Author: Dan Kent

A lot of new investors struggle with the first and most important step towards starting their investment portfolio. That step is choosing a broker. There are a plethora of options available to you, and the overwhelming amount of companies to choose from may make the decision difficult without proper knowledge. This article is going to dive into the 2 main types of brokerages and what advantages, or disadvantages come with each. I hope by the end of this article, if there was ever a doubt on which avenue you would like to head down, it is then cleared up. Let’s start with the “old-school” brokerages as I like to call them today, full-service brokerages. After that, we will tackle the new-age discount brokerage.

The Full Service Brokerage

A full service brokerage still allows you to sell securities like stocks, mutual funds, and ETFs. The difference between a full-service brokerage and a discount brokerage is simply the options that are available to you.

Full-service brokerages tend to offer a large amount of products and services like retirement planning and portfolio advice that discount brokers simply cut out. But by now you’ve probably realized that in life, everything comes with a cost. Full-service brokerages typically charge a  percentage to have these options at your fingertips. These fees can be anywhere from 1-3% of your total portfolio, and considering the average return of the stock market is 7%, it is a substantial amount of your investment returns paid to the money managers.

These large fees are partly the reason that full-service brokerages are starting to lose a substantial amount of customers. With the evolution of the internet, it has never been easier to become knowledgeable in the field of investing and because of this big banks are taking a lot of heat. Newly educated investors can now see that the charges that are being placed on their accounts are simply absurd and are moving towards a more self-directed portfolio to reduce their overall costs. Fees saved from not using a full-service brokerage can create substantially more capital for the investor if used wisely.

However, there are a few situations where even though you are getting charged more money, a full-service brokerage may be for you. If you have little drive or motivation to learn the intricacies of the stock market, a full-service brokerage even with its fees will generate more capital than investing on your own. This is simply due to the fact that earning money in the markets is a very difficult endeavour. Uneducated people doing so more often end up with a negative result.

Another possibility is the fact that although you consider yourself knowledgeable when it comes to the markets, you simply do not have time to be constantly monitoring your portfolio. Just as a landlord would take on the services of a property manager for a portion of their rent, you may decide to pay a financial adviser to invest and monitor your funds.

The Discount Brokerage

Alright, you’re tired of paying huge fees for something you feel you could be doing yourself. What’s the next step? Find a discount brokerage and get your money working for you. The problem? There is a huge selection available. In Canada, the number one discount brokerage available in my opinion is Questrade. I have been with Questrade for over 7 years now, and although the road has definitely been rough for them up to this point, they have fine tuned themselves into an online investing powerhouse. If you’re interested in learning more about them, check out this Questrade review.

Discount brokerages look to cut costs in other areas to be able to afford to charge you very little commissions to buy and trade stocks. Although most discount brokerages offer some type of directed investment by their own advisers, it is completely optional.

Deciding on a brokerage that best suits your needs completely depends on what you are looking for. There are some brokerages that offer programs and tools to help you make investment decisions. These brokerages although still cheaper than most full-service options, will typically have higher commissions. This isn’t always the case though. Large scale discount brokerages can still offer useful tools and programs with extremely low commissions. Brokerages like Questrade and Interactive Brokers can do so simply because of the huge amount of clients they have.

If you’re looking to take the management of your investing portfolio into your own hands, a discount brokerage is a no-brainer. These brokerages have taken over the market and advancements in fundamentals like security, trading platforms, and analysis tools have stabilized their once “shady” reputation back in the early 2000’s.

So which one should I choose?

When it comes to choosing a brokerage, you really have to decide if you have the time to educate yourself and manage your investments profitably. If you can, a discount brokerage can offer substantially higher returns over the long run simply in the form of money saved, which can be put to work in the markets. That being said, this is based on the fact that you are knowledgeable enough to provide average market returns. If you simply do not have the time to do so, or the willingness to learn, a full-service brokerage can provide you with excellent returns at a cost.

Dan Kent is a Canadian writer and Co-Founder of Stocktrades.ca. A DIY investor for 7 years now, Dan has a combination of dividend, growth and real estate investments in to his portfolio and is looking to continually grow his net worth. You can check his website out at stocktrades.ca, his column at ModestMoney or follow him on Twitter at @Stocktrades_CA.

Sean Cooper is the bestselling author of the book, Burn Your Mortgage: The Simple, Powerful Path to Financial Freedom for Canadians, available now on Amazon and at Chapters, Indigo and major bookstores, and as an Audiobook on Amazon, Audible and iTunes.