Imagine this – you have some money to invest, but you are unsure about which stocks to invest in. You want to seek help but are concerned about the advisory costs. What do you do in these situations?
You seek help from a stockbroker. But wait, which stockbroker? Full-service or a discount broker?
This is a very common dilemma, especially among market beginners. So, let’s take a closer look at full-service and discount brokers and understand how to make a choice between the two.
What do you mean by a full-service broker?
Full-service brokers are the traditional brokers. They are licensed brokers that provide a wide range of services to their customers, including investment advisory, portfolio and wealth management, and research services. With the passing of time and the advent of technology, full-service brokers these days provide their services both online and offline. They have branch offices to cover the vast areas of their operations.
Full-service brokers employ a dedicated research team tasked with a continuous fundamental and technical analysis of the stocks market and publishing their findings through various reports on stocks, companies, and the overall markets. They also provide their customers with dedicated Relationship Managers (RM) to cater to their needs and queries. Full-service brokerage firms, thus, employ a lot of people.
Some prominent full-service brokers operating in India are ICICI Direct, SBI Securities, Angel Broking, HDFC Securities, Sharekhan, and Kotak Securities. Since these firms provide a wide variety of services, they charge a higher brokerage commission.
Pros of Full-Service Brokerage Services
- The full-service brokerage firms provide various wider geographic exposure.
- They provide their customers with dedicated relationship managers who help and guide them in realizing their investment needs.
Cons to Full-service Brokerage Services
- They charge a higher commission than discount brokers because of the many services they offer. This is not a disadvantage per se, but with online broking available at cheaper prices, people come to full-service broking for specific purposes only.
- The transaction costs in full-service broking is usually high.
- There is a disparity in the brokerage plans offered to traders with high transaction volume who are allowed lower brokerage than the traders with lower transaction volume.
What do you mean by a Discount Broker?
As times are changing, stockbroking is becoming increasingly online. This has led to the emergence of a new species of brokers, known as discount brokers. The discount traders gained popularity because of their low and fixed brokerage plans. The commission they charge is fixed and irrespective of the trade value. They charge lower commission compared to full-service brokers owing to the limited services they provide.
Discount brokers carry out their operations and provide services online and have little to none physical presence. This helps them in saving the costs of hiring employees and spending on office infrastructure. Zerodha, 5paisa, Upstox, and TradeSmart are some of the prominent discount brokers.
Advantages of Discount Broking
- The most distinct advantage of discount broking is the lower commission charge on their services.
- There is uniformity in the discount brokers’ commission charged to all the traders irrespective of their transaction volume.
- The transaction cost involved is low.
- Since they do not offer investment advisory services and are not interested in selling any third-party products, discount brokers provide unbiased services to their clients and do not mislead them.
Disadvantages of Discount Broking
- Since most of the services are provided online, discount brokers lack a personal touch. They do not offer customers with relationship managers to help and assist them.
- Discount brokers do not provide advisory services. They do not report on companies or make trade calls to their clients.
- Discount brokers do not provide any portfolio management services either.
- They don’t offer a three-in-one account (banking + trading + Demat), unlike the full-service brokers.
How does one choose between full-service brokers and discount brokers?
We have already discussed and understood what full-service and discount brokers are. We have looked at the advantages and disadvantages of both. Now let us try to figure out how to choose between the two types of brokers.
Consider this; you have a significant amount of capital to invest in the stock market. You would naturally want to hire a broker who is knowledgeable and can advise you on appropriate investment opportunities. You are investing for the long-term and are not keen on frequenting the market yourself. So, who do you go to? A full-service broker.
Au contraire, if you are an investor with a smaller portfolio and do not wish to have a chunk of returns eaten by the commission, you would naturally prefer discount brokers.
The choice between full-service and discount broking is hugely dependent on the knowledge and expertise of the traders. Experienced traders who know the strings of the market prefer discount broking for buy and sell orders. Amateur traders seek help from full-service brokers to help them navigate the markets. The choice, therefore, is mostly dependent on the requirements and size of the capital you want to invest and also on the experience you have as an investor.
Full-service and Discount Brokers In Other Industries
Full-service and discount brokers have their presence in other fields of financial services too. One such example is the real estate sector, where they aid their clients in buying and selling real estate properties. If you know the property you want to buy/sell, you engage a discount broker by paying him a fee. Full-service brokers, on the other hand, will study the market and advise you in making a better choice. Both these types of brokerage services are provided in the insurance sector too.
Impact of the Ongoing COVID-19 Pandemic
Discount brokers have gained traction in their services because of the social distancing norms and lockdown restrictions imposed in the light of the ongoing COVID-19 pandemic. New traders are getting into the market using opportunities arising out of market corrections. However, traders with significant capital still prefer full-service brokerages.
Full-service brokers and discount brokers both have their pros and cons. What drives the choice between the two is the knowledge of the investors and their trading requirements.
Current trends show that tech-savvy investors prefer discount brokers, and high capital investors prefer full-service brokers. Therefore, if you are stuck on a choice between the brokers, take a moment, and review the size of capital you want to invest and figure out what extent of assistance you need with the investment. The answer will come to you, and you’ll choose accordingly.