Why Big-Ticket Brokers Aren't Worth It

Finding a full-service broker you can trust to look out for your interests first has gotten harder and harder in the dog-eat-dog world of financial services. The solution that many investors have found works best for them is to dump their high-priced advisors and find cheaper ways to take control of their own money.

But figuring out which discount broker can give you everything you want and need to implement your investing strategy can challenge even the most experienced of investors. Although broker satisfaction and performance surveys give you valuable information, you should take their rankings with a big grain of salt, because what's important to you may be far different from what any one particular survey's looking for.

Last week, the latest annual installment of SmartMoney's broker survey came out. It came to a number of conclusions about some of the most popular discount brokers and how they fared against one another.

If you look only at the headline results, then you'll get a very simple recommendation. Topping the list was Fidelity, with Scottrade coming in second.

But the overall rankings have a bunch of information behind them that's far more useful in helping you come to a decision about picking a broker:

• Fidelity scored well in most categories the survey tracked, including research, trading tools, and variety of investment products. But on customer service and commissions and fees, it finished in the middle of the pack.

• Scottrade and Capital One's (NYS: COF) ShareBuilder got five-star ratings for low costs, but their ratings in other categories varied widely.

• Looking specifically at trading tools and research, Fidelity, TD AMERITRADE, and E*TRADE Financial (NAS: ETFC) all clustered at the top, with Charles Schwab (NYS: SCHW) doing nearly as well.

Another interesting result was that even though big banks Wells Fargo (NYS: WFC) and Bank of America (NYS: BAC) have tried to enter the discount-broker industry with their WellsTrade and Merrill Edge services, neither seems to have put the full muscle of its massive resources to bear. WellsTrade showed up at the bottom of several important categories, including fees, research, and trading tools, while Merrill fared a bit better but still offered poor customer service and a subpar commission structure.

SmartMoney's survey is far from the only one out there, and different surveys often come to much different conclusions not just about overall satisfaction but in particular categories as well. By necessity, each survey has to make assumptions about what a typical customer looks like -- and that ideal profile may not match up well with you.

For instance, for many investors, price is very important. But just because a broker offers a low commission doesn't mean that it's the cheapest choice. Other factors, including various account fees and varying charges for different types of investments, can play a much bigger role in determining how much you actually spend. One example of this comes from the recent trend to offer exchange-traded fund trading at no commission. If you like a broker's lineup of commission-free ETFs and plan to use ETFs exclusively, then what it charges for commissions on other products that you'll never use is completely irrelevant.

Similarly, having resources to do your own research is essential to investing success. If you have those resources from elsewhere, however, you don't need your broker to provide them -- letting you focus on other traits.

On the other hand, many discount brokers have evolved from being no-service brokers to offering a full suite of services. Some go so far as to offer in-depth planning from company-affiliated professional planners. While these employee-advisors have obvious incentives to work within their employer's platform, they can nevertheless give you a lot of what you might pay far more to get at full-service brokerage firms.

The lesson with discount brokers is that spending time vetting your alternatives can make a huge difference in your experience down the road. By knowing the things about a broker that are most important to you, you'll have the best chance of finding exactly what you want -- without paying the arm and a leg that full-service brokers will charge you.

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At the time thisarticle was published Fool contributor Dan Caplinger has never been happier with his discount brokers. He doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Bank of America and Wells Fargo and has created a covered strangle position in Wells Fargo. Motley Fool newsletter services have recommended buying shares of Schwab, Wells Fargo, and TD AMERITRADE, as well as creating a bull put spread position in TD AMERITRADE. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy is always worth it.

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