Retail investors buy and sell stocks, bonds and other investment products through a broker. Though most offer the same scope of services, they all vary slightly in terms of capabilities and benefits. These types of brokers fall under the “discount broker” umbrella.
A discount broker is a brokerage firm that offers its services for less than traditional brokerage fees. There are typically only fees associated with account maintenance or trades—not the administrative fees or the active management fees you’d find at a traditional brokerage. It’s a trade-off. Lower fees enable investors to keep more of their investment gains. That said, they don’t necessarily have access to the personalized resources that a full-service brokerage might offer.
There are pros and cons to choosing a discount broker. It’s important to understand your needs as an investor when it comes time to choose a trading platform.
Discount vs. Full-Service Brokers
Discount brokers operate in contrast to full-service brokers. As the names imply, each serves a specific purpose in catering to investors.
- Discount brokers aim to keep trading services as affordable as possible. This means low-to-no commissions on trades, no account management fees and minimal costs for peripheral services. The downside? There’s a lack of individualized or customized solutions. Investors need to work from the same baseline and are in control of their own investment decisions.
- Full-service brokers operate as-advertised. They provide numerous services to investors. Not only that, they offer opportunities to customize the approach to each investor’s needs and wants. This can include everything from retirement planning and active portfolio management, to tax planning and even advice on private equity considerations. These services come with higher fees—generally because they’re actively managed.
There is no wrong answer for which type of brokerage to work with. Many retail investors simply choose discount brokers because they don’t need the robust services of a traditional broker—or, they want to preserve as much of their wealth as possible.
The Largest Discount Brokerages
Most brand-name brokers targeting retail investors fall under the discount broker umbrella. Most of these brokers do offer some level of full-service management. However, their primary usership falls under the discount broker category. Some of the largest discount brokers include:
- Charles Schwab offers a full suite of financial services, but is best-known for its trading platform. The company adopted a zero-commission trade policy in 2019.
- Fidelity Investments is another multifaceted financial services company that offers a low-to-no fees model on trades executed through its robust platform.
- E*TRADE was the first online broker and paved the way for online discount brokerages. Today, it remains one of the most reputable no-commission brokerages.
- TD Ameritrade offers a truly no-fee model when it comes to trades and account maintenance. It ranks among the biggest and best discount brokers today.
These platforms represent a fraction of the prolific number of discount brokers active today. Most previously charged commissions and account fees, until the rise of digital brokerages forced a race to the bottom on fee structure.
The Rise of Digital No-Fee Brokerages
For all intents and purposes, most discount brokers have a digital presence. There is, however, a new wave of discount brokers that’s disrupting the retail investing sector. These digital no-fee brokerages were the first to offer zero-commission trades and an absolutely free account structure.
- Robinhood was the first “disruptive” digital brokerage and forced an industry-wide shift to a zero-commission trading model. It’s one of the most accessible discount brokers.
- Webull rose to prominence as a Robinhood alternative. It offers many of the same benefits, with analytical tools and access to powerful trading insights.
- M1 Finance is one of the new-age leaders in robo-trading. It offers personalized investment options, while maintaining the fee structure of a discount brokerage.
While other brokers have since dropped fees to be more competitive, digital brokerages maintain competitive advantages. They offer more resources, modern trading interfaces and access to advanced trading options. In short, they’re bridging the gap between full-service capabilities and discount fees.
No Personalized Services or Advice
The biggest drawback of using a discount broker is the lack of individualized or personalized services. Specifically, traditional brokerages can tailor investments to each client and develop a more robust investment strategy based on a unique financial position. There are also an abundance of peripheral services to consider. These perks simply aren’t accessible through discount brokers.
Many discount brokers compensate for this lack of active management through technology. For example, robo-advisors have taken the place of fund managers at many discount brokerages. Likewise, automated trading tools make it possible to formulate your own trading strategy without relying on proprietary broker strategies. While they’re not a 1:1 replacement for traditional full-service brokerages, they’re enough for everyday retail investors.
Who Benefits From Using Discount Brokers?
The biggest draw of a discount broker is right there in the name: discount. Low-to-no fees make it easy for anyone to invest and trade, and to keep more of their wealth. Not everyone needs the services of a traditional broker, including retirement planning, money management, active account management and more. For those with the confidence to execute their own trades, discount brokers are ideal.
Discount brokers are accessible, convenient and simple. This also appeals to “set it and forget it” investors. Long-term investors who want to make regular contributions and rebalance at set intervals will find discount brokers a welcome solution. If you are looking for brokerage reviews and more investing insights, sign up for our Investment U e-letter below.
In short, more retail investors opt for discount brokers. Unless you have a reason to pursue more advanced trading advice and money management services… Why pay for them?