Understanding Stocks

56 UNDERSTANDING STOCKS
products like CDs. Although the full-service firms are particularly interested
in attracting a wealthy clientele, anyone can open an account. Just
don’t expect to receive a high level of personalized service unless you
have a large portfolio.
If you open an account with a full-service brokerage firm, you will
be assigned a person to handle your account. (Some of these companies
also have an online brokerage division that caters to do-it-yourself
investors.) Such people used to be called stockbrokers, but because
unscrupulous brokers gave the industry a bad reputation, they now refer
to themselves in a variety of creative ways: financial advisers, financial
consultants, account executives, or money managers.
Stockbrokers not only are paid to advise you what stocks to buy or
sell but will personally fill the order. For this service, they are paid a
commission on each trade; the commission on one trade can easily cost
you several hundred dollars. You are basically paying the broker to
oversee your portfolio and provide investment advice. Stockbrokers at
full-service firms often have access to research reports that are supposed
to be more detailed and accurate than the information that is
released to the public.
The problem with the commission-based system is that it is in the
best interest of brokers to see to it that you buy or sell frequently because
the more you trade, the larger the commissions that they receive. (Some
stockbrokers have been known to urge clients to buy or sell a lot so that
they could get more commissions. This well-known but illegal practice
is called churning.) It is also in the broker’s best interest to direct you
toward products that provide the highest commissions.
If you do hire a stockbroker, my advice is to find an honest, competent
individual who truly cares about your investment portfolio.
What you don’t need is fast-talking salesperson who wants to make
money for the firm by generating bigger commissions. Many retail
stockbrokers, in my opinion, don’t have the time or knowledge to give
you top-notch investment advice. On the other hand, a skilled stockbroker
can definitely do wonders for your portfolio.
In response to complaints about the commission-based system,
some brokerages have changed their fee structure for clients with large
portfolios. Instead of charging commissions on each trade, they now
charge a 1 or 2 percent annual fee. In the end, it is really your choice