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Full or self service: the amount of help you need investing determines whether you'll need lots of advice or just a firm to clear your trades.

The amount of help you need investing determines whether you'll need lots of advice or just a firm to clear your trades

After saving for years, Carole Copeland Thomas finally reached a point where she had some money to invest. "I'm constantly on the go, so I can't devote enough time to handling my own portfolio," says Thomas, a speaker and consultant in Woburn, Massachusetts. Her answer: find a broker she could trust to handle her investments and grow her wealth.

Not long ago, Bill Proctor found himself in the same position. A novice investor, Proctor picked up whatever he could on the stock market, boned up and soon started investing in his own picks. "Now," says Proctor, a reporter for WXYZ-TV (an ABC affiliate) in Detroit, "because I know enough to handle my own trades, it makes sense for me to use a discount broker to move in and out of the market."

As different as their approaches are, the paths Thomas and Proctor took lie like a fork in the road that each new investor eventually comes to: do you call your own shots and trade through a discount firm, or is it better to rely upon a full-service broker to handle everything from which stocks and funds you collect to when you buy and sell investments? "There's no solution that's right for everyone," says Robert M. Cotton, vice president of investments with Prudential Securities in Chicago. Different personalities, says Cotton, approach the market in their own way.


First, it's good to get a view of the market, namely what kinds of firms are out there to help you invest and just what they can offer. Although the lines aren't hard and fast, brokerage firms generally fall into one of the following categories:

Wire-house firms. These are the national and international firms such as Merrill Lynch and Prudential Securities that run print and television ads and have become household words. The expression "wire house" dates back to the time when only the largest firms had high-speed communications for spreading information. Today, these firms offer a full range of products and services, everything from private consultation to a selection of in-house mutual funds.

Regional firms. Smaller cousins of the stalwart wire houses, regional firms concentrate on one area of the U.S. Examples include Wheat First Butcher Singer based in Richmond, Virginia, and Legg Mason Wood Walker based in Baltimore.

Independent brokers. Brokers need to have a securities license, but they don't have to work for a brokerage firm. Some prefer to remain independent. "I have an affiliation with National Securities Corp. in Seattle, a full-service firm that provides me with back-office support," says broker David Fields, who works out of his home in Massachusetts. "I have a great deal of flexibility in how I serve my customers.

Discount brokers. As the name suggests, discounters offer the chance to invest for less money, compared with using a full-service broker. If you were to execute five trades with a full-service broker (including different types of stocks and bonds), you might pay a total of $700 in commissions. With a discounter, you'd pay half that amount, or even less.

Don't jump to conclusions, though. While discount brokers have a reputation for being "bare-bones" operations offering few services, that's not always the case. Charles Schwab, for example, has introduced mutual fund supermarkets and no-fee IRAs, and will even dabble in a bit of personal finance advice.

Deep discount brokers. Here, at the cheapest end of the investing spectrum, are a group of brokers who will execute trades at a rock-bottom price, provided you're willing to settle for no frills whatsoever. If you're the independent sort who can function on your own, there's a bargain to be had. Five trades that might cost you $350 in commissions at Charles Schwab might cost $125-$150 at deep discounters such as Dreyfus Brokerage, Brown & Co. or Ameritrade Securities.


Before you choose between teaming up with a broker or going it alone, it's a good idea to assess your needs. Are you scared of the market, do you shrink at the thought of crunching numbers or are you jazzed on the thought of diving headlong into stock analysis? Do you eagerly tear through the newspaper's business pages to see how certain companies are faring? just how much time are you willing to put into investing? The answer to these questions will give you a decent idea of which way to go. Here's a hint: the more help you think you might need or the more you'd like to sit back and let someone do the grunt work, the more you should consider a broker. The more time and effort you're willing devote, the better off you'd be with a discount firm.

Patricia Mosley was mulling over just how involved she wanted to get in her portfolio when she took a retirement investing course at Chicago State University. Mosley, who has since retired from her post as a librarian in the Chicago public school system, established a relationship with her instructor, Robert Cotton. And five years later, she remains a devoted client. "He doesn't have his own agenda," she says. "He listens and helps me to get what I need. For now, the emphasis is on trying to keep my current taxes low while providing me with some income and future growth."

After attending several seminars, Thomas decided on a full-service broker. "I discovered how complex the market is," she says. "I knew that I wouldn't have time to keep up with everything. So I chose to find someone I could trust, even if that meant paying more in commissions."

Friends and relatives referred Thomas to Fields, the independent broker with National Securities: "At our first meeting," recalls Thomas, "he didn't try to sell me anything. He asked me about my goals and recommended that I put my investment capital into a money market fund. Eventually, he began suggesting individual stocks for me to buy." Fields prefers individual stocks over mutual funds for some clients because the growth potential is greater.

One of the main reasons for choosing a full-service broker is to take advantage of that firm's research. Instead of doing your own stock picking, you can follow the advice of research departments that have millions of dollars at their disposal and teams of professional sec analysts. "As an dent," says Fields, "I don't have to push whatever stocks the firm has in inventory. Instead, my firm provides me with research from many leading brokers."


While many investors are content to follow full-service brokers' advice, Bill Proctor prefers to go his own way. "I had heard from many of my friends that the big firms won't leave you alone," he says. "All they want to do is sell you what they have on hand." Sure enough, Proctor got a taste of how persistent a broker can be shortly after he took an interest in investing. After attending a seminar, he was pursued by a broker from a leading full-service firm who just didn't understand the word no. "He kept calling me, trying to get me to buy a small-company mutual fund, which I didn't want," says Proctor, who nevertheless tracked the same investment to see how things turned out. "Not too long afterwards, the same fund's price went down the drain."

So Proctor decided to educate himself about the market and work with Schwab, a firm recommended by his associates. "I follow several low-priced stocks and trade them frequently, moving in and out within 45 days. Because I trade actively, the people at Schwab provide me with the latest information on the companies I ask about." Although few discounters have in-house analysts, most will send investors research materials from sources such as Standard & Poor's, Value Line, Bloomberg and Morningstar.

"I actually do my trading online," says Proctor, "And once I have the necessary information, I even trade options and sell short online. [Selling short is a maneuver aimed at making money when a stock's price falls.] Because I trade online, I get further discounts on the commissions I pay."

As you might have read in BLACK ENTERPRISE last October (see "Bytes to Bucks"), many discounters offer lower fees for electronic trading, as little as $7.95 per trade in some cases. Since most discount firms are easily accessible by phone, computer skills aren't mandatory. just remember, you'll pay a slightly higher commission when you place your order over the phone.


While there are distinct differences between discount and broker-assisted investing, that doesn't mean using one excludes you from the services of the other. Take the case of Stephen C. Lewis, national president of the National Black MBA Association. "There are some situations where I just want to buy a certain stock," says Lewis. "For those trades, I'll use a discounter." Other financial decisions, Lewis says, have a longer-term impact. "For them, I want to work with someone I can trust. Fortunately, one of my college friends is the local branch manager of A.G. Edwards, a national firm. I can call him when I want to. Last October, for example, when the market fell sharply, I asked him what to do and he told me to stay put, which was good advice. The rest of the time, he knows not to bug me."

Most investors would agree with the "don't-bug-me" message but probably wouldn't mind some hand-holding as well. "There is so much information available today that it's difficult for one person to deal with," says Cotton. "Few people know all they need to know about asset allocation, insurance, estate planning, refinancing a mortgage, how to handle a lump-sum distribution, and so on. A full-service broker can be an advisor in all of those areas."

Fields agrees that a fall-service broker can help many investors. "You need to be very knowledgeable to work with a discounter who is probably just a voice on the other end of the telephone taking your order. Even savvy investors may prefer working with a full-service broker they can trust, he says. "Orders can be lost in cyberspace for days. I usually can get right back to my clients with a confirmation of their trades."


Should you lean toward signing with a broker, keep this in mind: brokers may seem a bit eager to push you into a number of products or even trades. "Sometimes brokers may have conflicts of interest with their clients, who would be better off not buying and selling so often," says Matthew England, who now works in the Sacramento, California, branch of Charles Schwab.

When it comes to compensating brokers, sometimes problems do arise. Since the majority of brokers are paid on a commission basis, they reap a return every time they buy or sell company shares. At the larger firms on Wall Street, you'll also find brokers eagerly pushing in-house mutual funds, which charge investors a fee. Again, brokers who sell clients on those same load funds pocket a commission from the sale.

No matter how good your relationship with your broker, or how much they have earned your trust, keep an eye on how they handle your account and how often they trade shares or, in industry lingo, "churn" your portfolio. As a precaution, ensure that your broker keeps your best interests foremost in mind. Here are a few steps to safeguard against churning.

Write down your financial goals and have your broker sign a copy. Once your broker signs such a document, they are more likely to abide by its terms.

Don't sign discretionary trading agreements. Insist that all trades have your approval. (That way, your broker will have to call you and review every sale or purchase of Stock, effectively maintaining your veto power over excessive moves.)

Keep your eye on your monthly brokerage statements. Ask hard questions if more than 25% of your account turns over each year.

Inquire about all fees. Most importantly, ask about "wrap" accounts, in which you pay an annual fee of about 3% of assets under management. That fee covers all costs, including commissions, so you won't get churned.

The case for using a discount broker is fairly straightforward. Your trading costs will be lower and you won't have to contend with sales pressures. If you're ready to direct your own investment strategy, a discounter may be suitable. On the other hand, discounters provide minimal--if any--personal financial advice. If that's what you want from a broker, you'll need to go full-service. Just make sure you shop carefully so that you'll get the guidance you're paying for.


Since working with a full-service broker is essentially establishing a personal as well as professional relationship, it's important that you're comfortable with whomever you select.

Do your homework. It's always a good first step to ask friend, relatives, business associates, etc., for referrals

Meet with at least three prospective candidates. At each meeting ask the broker what unique attributes he or she brings to the table. Chances are, you'll find yourself responding positively to one of the candidates.

Ask potential brokers about their firms' stock-picking skills. If you intend to invest in individual stocks, ask potential brokers about their firms' stockpicking abilities. Third-party firms, such as Zacks Investment Research in Chicago, rate brokers in this area, insist upon seeing a recent report.

It's OK to crawl before you walk. Invest a small portion of your money but keep most reserve. If you're happy with your relationship, you can allow it to expand. Otherwise, you can start over with a new broker.


Before deciding on a discounter, go through the following checklist:

Commissions. How much does a broker charge for the types of trades you execute?

Spreads. If you're buying Nasdaq stocks, you'll want some evidence that you'll be buying lower than the asking, selling for more than the bid price.

Margin loans. If you intend to buy stock with borrowed funds, find out what interest rates the broker will charge.

Mutual funds. How many funds are available, and at what cost?

Online trading. Most discounters offer electronic investing, but you should check first, then find out what other information you can access while online.

Statements. Ask to see samples so you can judge them for clarity and for help with tax preparation.

And remember. Discounters vary widely in the materials they'll send to investors, from company research to tax guides. Find out the kind of help and advice the firm will give you. The trick is to pay hat you need and not pay extra fro services you'll never use.
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Title Annotation:Money Mangement
Author:Korn, Donald Jay
Publication:Black Enterprise
Date:Apr 1, 1998
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