broker types: full service, discount, robo

In short

A friend of mine once spent three weekends comparing brokers, and then opened none of them. If you are holding the same worry, take heart, because the choice is smaller than it looks. A broker is the company that holds your account and carries out your trades. There are three common kinds: full service, discount, and robo. They differ mainly in how much help you get and what that help costs. Before you sign up, check the broker's registration on the SEC and FINRA tools named below. Then read the fee page, find the account minimum, and ask what happens if the firm fails. That is a good afternoon's work.

The whole of it

What it is

I once watched my neighbor try to pick a checking account by reading every brochure in the bank lobby. He left with a headache and a free pen. Choosing a broker can feel the same. So let me say it plainly. A broker is a firm licensed to buy and sell investments for customers. You open an account there, put in money, and the firm places the orders you give it, or in some cases places them for you.

A full service broker pairs you with a person. That person goes by a few names, and the names do not mean the same thing. "Financial advisor" is a broad job title that anyone may use, with or without a license. A registered representative is a person licensed through a brokerage firm to sell securities, and FINRA oversees that license. Some people are both. A registered representative can call himself a financial advisor, so the title alone tells you little. The licenses behind it tell you more, and you can look them up for free. Ask what licenses the person holds, and ask how the person is paid. The advisor talks with you about goals, taxes, retirement, and sometimes estate plans. In return, the firm usually charges more. The charge might be a percent of the money you hold there, a commission on each trade, or both.

A discount broker lets you run your own account through a website or an app. Nobody calls to check on you. The trade is that fees are often very low. Some firms advertise $0 commission on stock trades, so check each firm's own fee page for the current price. Still, "free" trades do not mean a free account. The fee page matters.

A robo advisor is a service that uses software to build and manage a mix of funds for you. You answer questions about your age, your goals, and how much ups and downs bother you. The software picks a mix and keeps it balanced over time. Many of these services charge a small yearly percent of your balance.

How it works

If you have ever hired a plumber, you already understand the three ideas here. Some folks want a pro who handles everything. Some want the parts and a good manual. Some want a service plan that just runs.

With a full service broker, you meet or talk with an advisor and share your finances, and the advisor suggests a plan. You approve it. The firm does the paperwork. The advisor may be paid through fees you can see, or through commissions the firm earns when products are sold. That difference is worth asking about out loud.

With a discount broker, you open an account online. You link your bank, move cash in, and choose your own investments. The broker fills the order and shows it in your account. You make every call yourself. That suits some people well and wears on others.

With a robo advisor, you finish the questionnaire, and the service builds your mix. It puts new deposits to work, rebalances, and sometimes sells losers to cut taxes. You can see what it holds, but you are not picking each piece.

One more thing applies to all three. Your cash and investments sit in a brokerage account, and the broker is only the keeper. If a firm fails, the account is protected by the Securities Investor Protection Corporation, called SIPC, up to a limit set by law. SIPC covers the loss of assets when a firm fails. It does not cover a drop in value from a bad investment. The limit is the current figure, which the official source publishes each year, and SIPC explains the details on its own website.

The numbers, and where to find yours

I have noticed that people read a fee the way they read a speed limit sign, which is to say quickly and hopefully. Slow down here. A small percent grows large over many years.

Start with the fee schedule. Look for the yearly advisory percent, any commission per trade, fees on mutual funds, the account minimum, and charges to move your money out. Robo services often list one flat yearly percent. Full service firms may list several layers.

To check that a firm and its people are real and in good standing, use two free tools. FINRA BrokerCheck, run by the Financial Industry Regulatory Authority, shows a broker's licenses, work history, and any complaints. The SEC's Investment Adviser Public Disclosure site shows the same for advisory firms. Search the name before sending over a dollar.

Look up the firm on SIPC's member list too. Then read Form CRS, a short relationship summary that firms must give to retail customers. It explains in plain words what the firm does, what it costs, and where its interests may clash with yours. Many people never open it. It runs only a few pages, so give it a look.

A worked example

Let me tell you about a woman named Dana, who is 40 and has $100,000 to invest. She is weighing a full service advisor against a robo advisor. Neither would be wrong for her. She simply wants to know the cost.

The full service advisor charges 1 percent of her balance each year. So 1 percent of $100,000 is $1,000 a year. The robo service charges 0.25 percent a year. So 0.25 percent of $100,000 is $250 a year. The gap is $1,000 minus $250, which is $750 a year.

Now stretch that over ten years, and keep the balance flat just to keep the math honest. Ten years at $1,000 is $10,000 in fees for the advisor. Ten years at $250 is $2,500 for the robo service. The difference is $7,500. Her balance would not stay flat, and that matters. If it grows, the percent fee grows with it, so the dollar gap widens.

Here is the fair part. Dana is asking what the extra $750 a year buys. If it buys a person who helps her plan for retirement, taxes, and a house purchase, she may feel it earns its keep. If it buys little more than a portfolio the robo service could build, she may not. Only she can weigh that. She has the numbers to do it.

Where it goes wrong

I have made my share of mistakes with money, and nearly all of them came from hurrying. A few traps are worth naming kindly, because smart people fall into them.

The first is judging a broker by the headline. "$0 commissions" sounds like the whole story, but a broker can earn money in other ways, such as fund fees, interest on idle cash, or payment for routing your orders. Read the full schedule, not the banner.

The second is not asking how the advisor is paid. A fee based on your balance and a commission on products sold can push an advisor in different directions. Ask directly, and ask for it in writing. Form CRS helps with this.

The third is leaving cash sitting idle. Some brokers pay little interest on cash that has not been invested. Check the rate on the cash sweep, which is the place your uninvested money lands.

The fourth is skipping the exit fees. Some firms charge to close an account or to move it to another broker. A transfer fee of even $75 or $100 is worth knowing about before you start, not after.

The fifth is mistaking SIPC for a safety net against loss. It does not cover market drops. It covers a failed firm, within its limit.

The last is picking a style that does not fit your nature. If you hate making choices, a bare discount account may sit unused. If you like control, a robo service may itch. Neither is a flaw in you.

Questions to answer before you leave this page

Do you want a person to talk to, or are you happy to run things on your own? What does the broker charge in total, counting the yearly percent, the fund fees, and any trade costs? How is the advisor paid, and does the firm put that in writing? Have you searched the firm and the advisor on FINRA BrokerCheck and the SEC's adviser site? Is the firm a SIPC member, and do you know what that does and does not cover? What is the account minimum, and can you meet it without strain? What would it cost to leave, and how long would a transfer take? And if the market fell hard next year, would you sleep better with a person at the other end of the phone?