Where to Buy ETFs: Full-Service Broker vs Discount Broker

Before you can buy ETFs, you’ll need to open an investment account with a broker. What type of broker is best for ETFs? With dozens of brokers to choose from, this decision can be a challenging one. The first step is to determine whether you need a full-service broker or a discount broker. 

Read on to find out how to choose the right broker for your investment needs. 

Full-Service Broker vs Discount Broker: What’s the Difference? 

A full-service broker offers investment advice for a fee, whereas a discount broker may be a good fit for an investor who prefers to manage their own investment portfolio for a reduced cost. Before choosing between these two main types of brokers, investors should learn how they work, and then weigh the pros and cons of each type of portfolio management. 

What Is a Full-Service Broker? 

A full-service broker is a broker-dealer firm that provides a broad range of services to its clients, including investment research and advice, as well as a range of financial planning services. Full-service brokers are primarily compensated through commissions or sales charges, which are fees paid based on transactions executed for clients.

Who Are Full-Service Brokers Best For? 

Full-service brokers are generally best for investors who don’t have the time, skills, or desire to manage their own investments. Investors should keep in mind that many full-service brokers, especially experienced brokers, may have a minimum asset requirement, such as $100,000 to $250,000, to invest. Full-service brokers may offer ETFs, but they may also recommend stocks, bonds, or mutual funds to their clients.

What Is a Discount Broker? 

A discount broker is a company that provides an investment platform for investors to buy and sell investment securities online at a reduced cost. Discount brokers may offer educational tools and resources to investors at no additional charge. Although discount brokers execute orders for their clients, investors generally will do their own research and place their own trades.

Who Are Discount Brokers Best For? 

Discount brokers are generally best for investors who prefer to manage their own investments, from research to placement of trades. These are self-directed investors and traders who generally do not want or need advice or assistance from a broker or advisor. Since many investors prefer low-cost investments, ETFs are a popular investment type on discount broker platforms. 

It’s also important to note that many discount brokers offer commission-free trades with a wide range of ETFs. This is a significant benefit, especially for investors who place small or frequent trades. Furthermore, for investors who want to use only ETFs to build a portfolio, going the self-directed route with a discount broker ensures control over security selection, whereas full-service brokers don’t always recommend ETFs. 

Full-Service vs Discount Broker 

Full-service brokers and discount brokers both have unique qualities that can be advantages or drawbacks, depending on the needs of the investor. Therefore, like researching and buying investments, choosing a broker is a personal choice, and investors should consider the pros and cons of each type of advisor before making a choice. 

Choosing a Full-Service Broker 

Pros 

  • Personalized advice: Full-service brokers can give personalized advice and recommend investments that are suitable for your unique financial goals and risk tolerance. 
  • Range of services: In addition to investment advice, many full-service brokers provide access to exclusive research as well as a variety of other services, including retirement planning. 

Cons 

  • Higher fees: Full-service brokers generally get paid through commissions and sales charges that are significantly higher than discount brokers. 
  • Lack of control: Since full-service brokers make recommendations and place trades, clients have limited control over security selection and the timing of investments. For ETF investors, this can be a significant drawback because some brokers may prefer or be incentivized to use securities other than ETFs. 
  • Not ideal for beginners: Commissions on ETFs and other securities are generally the same no matter the trade size. Since beginning investors tend to place small trades, even a $25 commission can become a significant drag on net returns after factoring in the trading costs. 

Choosing a Discount Broker 

Pros 

  • Low cost: Discount brokers charge lower fees than full-service brokers, and some offer commission-free trading on a large selection of ETFs. 
  • Control over decisions: Investment accounts held at discount brokers are completely self-directed, which means the investor does their own research, security selection, and trading. 

Cons 

  • No advice: Discount brokers may offer some research tools and educational information, but clients don’t receive professional investment advice or help with portfolio management. 
  • Can be overwhelming: Learning how to use new tools and resources with limited guidance can be challenging, especially for beginners. 

Bottom Line 

Determining where to buy ETFs begins with deciding whether to choose a full-service broker or a discount broker. A full-service broker provides advice and portfolio management for a fee. These brokers are generally best for high net worth investors who want investment advice. Discount brokers provide trade execution and an online platform for a discounted fee, and are typically best for self-directed investors wanting to manage their own accounts. 

 

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