The decision of how to choose a stockbroker is a vital decision to any private investor.
Experience shows that human nature wants the 'cheapest' or 'best value', but these are not always appropriate. As an investment professional, I can confirm that most members of the public have roughly zero investment skill. This is not meant to be derogatory, just realistic.
However, most members of the public also seem to think that investment is or should be 'easy' and as a skill has very little value added. If only it were so.
The reality is that most people have limited financial skills because these things take effort, study and thought. In our time away from an occupation, we want to relax, not analyse annual reports. But to be successful, we need to see a lot of annual reports before we find the one we really like. This is a real chore.
Therefore, the 'cheapest' stockbroker, by very definition, is the one who provides the lowest level of service. The cheapest brokerage is probably an online only firm or subsidiary and provides no advice or research. In life, you get what you pay for.
This low price may be very tempting, but if it means that we all
need to carry out every piece of research and make every decision
unaided, is it really good value? Should we not have some form of stock broker selection criteria?
If an investment is made that proves to be shockingly poor, and loses eighty or ninety percent of the money invested, was it a good deal to only pay a few dollars or pounds for the transaction? If a stockbroker had pointed out just how risky the deal was, might the investment funds have been saved? Would that have been money better spent than saved? If an extra thirty or fifty dollars spent on advice from a stockbroker could have saved one thousand, might that not be an acceptable price to pay?
The advent of the internet has had the impact of making
information flow very freely and at very low cost around the world. In
information terms, the difference between the 'haves' and 'have nots'
has diminished drastically. In many cases, the difference lies simply
between those who bothered to look and find the facts and those who did
not. Yet understanding and interpreting the information is still a vital
skill.
Watch These Free Videos And Learn To Trade The Stock Market
A different question, to which your author does not know the answer, is
this: Has the ability to trade stocks online for under ten dollars or
pounds per trade made us any better as investors? If the answer is no,
and that as an individual a private investor does not have the required
skills to flourish, might a higher price brokerage that offers research
and guidance be more appropriate?
Whilst it is true that low cost dealing and lower minimum transactions have made equity markets more accessible to private investors with a limited budget, this may not be appropriate. Clearly it has expanded the number of trades being made, which stock exchanges and around the world must be grateful for. But, should an investor with very limited funds be investing in the markets?
Anyone involved in investment for some time will have heard either or both of Warren Buffett and Charlie Munger explain what they feel it is normal for an investor to be able to weather a 50% fall in the value of their holdings and that people that are unable to do so might not be suited to common stock ownership. These are strong words, but they do indicate the type of mindset that is - or ought to be - required for long-term ownership of equities. These are real trading businesses and need to be viewed as such.
Asking this in a different way, the concept of execution only services means that it is up to the client to make their own investment decisions. But what if they simply are not capable of it? We have all, let's be honest, met someone at a party or dinner that has explained their incredible insight to us about the stock market and we have wondered incredulously what they are thinking of. At what point might financial companies be asked to step in to protect us from ourselves?
Such questions clearly bring into focus the different potential level of services from a stockbroker and which might be appropriate for you. Most brokers offer more than one level of service and can often tailor their offerings to the needs of an investor. In the future, it might pay to ask how else a stockbroker can help you.
For other pages of interest:
What Does A Stockbroker Do?
Internet Stockbroker
How Much Should You Be Paying In Stock Market Fees?