While most discount brokers will not give you much face to face interaction or indepth research by definition, is it really worth paying 10 to 20 times the amount per trade to get this:
Well I don't think so. Lets take this example, lets take the following 3 examples to determine how much of a difference the broker selection makes in your final earnings. The following table assumes a $10 fee per trade at a discount broker, actually somewhat high for a discount broker. It also assumes a 10% return on investment regardless of amount of trades made, which probably bias towards long-term investing, but it is just used to demonstrate an overall concept:
Amount Invested
$1,000 $10,000 $100,000
Trading Level
1 100-10 1000-10 10,000-10
10 100-100 1000-100 10,000-100
100 100-1,000 1,000-1,000 10,000-1,000
The example below shows the use of a full service broker with a fee of $100 per trade. Typically a full service broker also charges maintanence fees for accounts and depending on what their pay is based on, may attempt to have you be a more active trader to earn additional commission. Lets also give the full service broker the benefit of the doubt and give you an additional 5% return on investment, for a total return on investment of 15% (though I find this not to be the case, but again for demonstration purposes only)
Amount Invested
$1,000 $10,000 $100,000
Trading Level
1 150-100 1,500-100 15,000-100
10 150-1,000 1,500-1,000 15,000-1,000
100 150-10,000 1,500-10,000 15,000-10,000
As you can see from the above tables, only with the investor investing $100,000 does the full service brokerage outperform the discount brokerage in 2 of the 3 trading levels. In the $10,000 investment only the 1 trade situation outperforms the discount brokerage. In the $1,000 investment category the full service brokerage never outperforms the full service brokerage. Keep in mind this is using a very general example that assumes no difference in investment gain regardless of trading level and also assumes that the full service brokerage outperforms the discount brokerage in terms of investment gain.
In general the above table leads to two important conclusions. Small investors rarely benefit from the use of a full brokerage. I assume few people reading this are investing much more than $10,000 a year. Also the more active traders get significantly less return on investment by using full service brokers, in all three situations of 100 trades per year the discount brokerage out performs the full service brokerage.
Based on this analysis it can be concluded that only high net worth investors, who perform an intermediate or low range of trades should use a full service brokerage, all others would be better off with a discount brokerage. This also assumes that the high net worth investors cannot out perform or come within 5% of the return of the full service brokerage, which may be an accurate statement in some cases. But overall, an investor with an intermediate knowledge of financial investing can usually perform near the level that could be obtained from a full service brokerage. The question then becomes how much time would it take to gain said knowledge, and what is worth of the high net individuals time, which would be a calculation for another time. It would go something like this on a basic leve (static deficit of invesment compared to broker + (hours to gain sufficient financial knowledge * pay rate of individual or marginal worth of that time to the individual) - (%gain in investment performance * amount invested)).
Any basically what this comes down to is that in most cases by building your own financial investment knowledge you are able to outperform full service brokerages by using a discount broker. Therefore, when armed with the adequate level of financial knowledge the internet can provide free of charge all the information you may need to invest correctly, and thus your may objective should be to find the lowest rate brokers possible.
Below is my list of top discount brokers:
Just2Trade - cost per stock trade $2.50, minimum balance $2,500
ShareBuilder - cost per stock trade $4, minimum balance $0, ING Direct services
Scottrade - cost per stock trade $7, minimum balance $0, minimum deposit $500
These are all basically no bells and whistles brokers. Although Sharebuilder does hold the distinction of having access to ING Direct services. Scottrade also has some of the fastest transaction times in the business and holds a few more analysis tools the other recommendations. Just2Trade on the other had is for slightly more advanced traders with no hand holding, and a downside for the new and lower income investors of having to maintain a $2,500 balance.