Use Financial Services Wisely

Use financial services wisely. Once you have decided what type of investment account you'd like to open, the next nuts and bolts decisions involves choosing a financial services provider (a stockbroker). Don't let the images of someone calling you during dinner trying to sell you the next hot stock, it really is not like that at all. Those are just Hollywood images don't let that scare you away. Think of stockbrokers as middlemen that bring buyers and sellers together. For this service, they charge a fee for this service.

Therer are literally hundreds of brokers, financial planners and other financial service providers but for our purpose we will discuss only three: full service brokerages, fee based financial planners and discount brokers.

The Full Service Broker

The full service brokerage firm provides hand holding through the investment process and they let you know you are in it alone. They provide very personalized service and give you advice on what to buy and sell. These benefits can easily be outweighed by the costs. This hand holding and pesonal care does not come cheap. The fees and commissions that full service brokers charge can eat away at your investment profits. It is hard enough to make money without another obstacle, so we believe you should avoid these fees if possible.

Another concern with full service brokers is that they have an inherent conflict of interest. Most full service brokers are paid a commission every time you buy or sell an investment. So the more you trade, the more money your broker will make. This is a very bad idea for two reasons: commissions eat away at your profits and a lot of trading will cause you to pay short term capital gains tax.

So it is against your interest to trade often, but it is in your brokers best intererst so he can rake in the fees. No matter how well intentioned, a full service broker will face a conflict of interest. If you must have a full service broker, make sure your interests are put ahead of his.

Fee Based Financial Planner

If you still feel the need for one on one personalized financial service, fee based financial planners are worth consideration. Fee based planners charge their clients based on a variety of factors. Usually they charge an ongoing fee based on the percentage of assets. Say 1% a year not including brokerage fees and fees associated with mutual funds. Some planners charge based on per job or hourly basis. Finally, they earn a commission on the products they sell you. The planners don't have the incentive to ecourage frequent trading or possible inherent conflict of interest, but they are jus as expensive as full service brokers.

Discount Brokers

To avoid the pit falls of a full service broker and the fees of a financial planner, using a discount broker may be your best option. Discount brokers offer barebone financial service without the hand holding or investment advice. Investors don't have to worry about aggresive sales tactics or the conflict of interests. Discount brokers allow investors to buy and sell what they want without intefering. Most importantly the commissions at discount brokerage firms are a fraction of the commissions at full service brokerage firms. Discount brokers make investing easier but their are a lot of them to choose from.

When looking for a discount broker, cost should be a major focal point. There are a wide array of options within the discount broker arena. For example, commissions can range from $30 to less than $10, depending of the broker. Sometimes to qualify for these low commissions, you must do a lot of trading. Let's say 20 or 30 a month or quarter. All else being equal, frequent trading will eat away at your profits in the long run.

Sometimes brokers offer peripheral services such as third party stock research. Make sure the broker of your choice has a good customer service department because you may need to ask questions about your account.

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