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Full-service brokers provide handholding through the investment process that often gives investors reassurance that they are not going it alone. They provide personalized service, as well as advice on what to buy and sell. This is the greatest benefit to full-service brokers, but the benefits can be outweighed by the costs—literally. This handholding does not come cheap, and the commissions charged by a full-service provider can quickly eat away at any investment gains your portfolio makes.
Things To Know
- Full-service brokers provide personalized service, as well as advice on what to buy and sell.
- Full-service brokers have a conflict of interest that drives many of their recommendations.
Beware conflicts of interest
Another concern with full-service brokers is the inherent conflict of interest that drives many of the recommendations they give clients. Many brokers are compensated by trading activity, not performance. For example, most full-service brokers are paid based on a commission they receive for executing sales and purchases. So the more you trade, the more your broker will make. One of the ways frequent trading will affect you is that it leads to higher commissions that will eat into your returns. It can also cause you to pay higher taxes on realized short-term capital gains.
Brokers want you to trade often
So while it may be against your best interest to trade often, a full-service broker has an incentive to encourage frequent trading, just to rake in the fees. At the end of the day, even the well-intentioned commission-based brokers face a conflict with your interests. If you decide to use a full-service broker, make sure to seek out those upstanding professionals who are willing to look beyond this conflict and put your interests ahead of their own.