Discount broker vs full-service broker: Which one should investors pick?

Discount broker vs full-service broker: Did you know that choosing the right broker can not only determine your overall cost but also experience of investing on Dalal Street? While two main types of brokers, discount brokers and full-service brokers, enable investors to carry out their trades in the stock market, the range of services and the transaction fees they charge vary. In this article, you will learn about the difference between the two kinds of brokers and the key advantages offered by each.

What is the basic difference between a discount broker and a full-service broker?

Discount brokers offer lower fees and are more suitable for self-directed investors as they provide basic trading services without personalised advice, whereas full-service brokers offer a range of services including investment advice and retirement planning, including personalised support.

Here are some of the key pros and cons of each type of broker:

Many financial experts say the decision to go with a particular kind of broker should be based on one’s trading style, and level of expertise and experience in the market.

“The largest problem statement, for any investor or trader, other than the (research) reports, pricing and trading software offered is the convenience of a well-built system. Businesses that focus on a dedicated problem will always be better placed to serve customers. Online brokerages that have a singular focus are usually the answer for all types of investors,” Mohit Mehra, VP-Primary Markets and Payments at Zerodha, told Zeebiz.com.

“If one is paying a bigger brokerage than the market standard today, they should ask themselves if they are getting adequate value for the price,” Mehra elaborated.

He also asserted that discount brokerages are suitable for all types of investors when it comes to security and charges.

It is crucial to consider the product including trading application and reporting, pricing and financials while evaluating a stock broker. “While pricing tends to be similar among brokers, small differences can accumulate into significant cost variations over time,” he said.

Investors’ dilemma: When to pick which type of broker?

Choosing between a discount and a full-service broker can be a crucial decision for many investors, as it warrants thorough understanding of one’s investment goals, risk tolerance, and level of involvement.

Investors or market enthusiasts must take into account factors such as their financial knowledge, time availability and comfort with decision making to pick between the two, say analysts.

Almost 77 per cent of new monthly accounts open with discount brokers today, which clearly demonstrates investor preference, but this choice is not necessarily driven by security considerations but rather pricing, user interface, seamless account opening, and constant digital and performance marketing-related efforts, said Kunal Sanghavi, Chief Strategy & Transformation Officer at HDFC Securities.

Some of the bank-based brokers have also launched low-cost or discount broking platforms to capture masses, he said.

Customers with high net worth and with vintage experience often prefer to have demat accounts with bank-based brokers than other brokers given the “trust and safety aspects”.

“Bank demat accounts have their own niche and relevance with vintage and high net worth customers while others will migrate to bank-based demat account as their wealth and vintage increases,” Sanghavi added.

“Bank based brokers offer relationship managers, branch access, on-call customer support, research recommendations which not only provide personal touch but enables better understanding of the customer profile and needs to make a bespoke offering, services providing highest level of premium services, recommendations at complete convenience to customers backed by digital tools and methodologies… Standard only digital solutions provided by discount brokers may not necessarily address needs of the experienced customers,” he explained.

“Bank-based discount brokers on the other hand are providing all the comprehensive services at discounted prices making it attractive for customers to have secure digital broker at low cost with all in one features like research, in-app third-party integrations and simple execution,” Sanghavi added.

Mehra also said that the “convenience of a well-built system often outweighs the allure of lower fees”.

Should you consider a stock broker’s financials while taking your pick?

It may be wise to also factor in a broker’s financials besides popularity.

All brokerages are subjected to the same regulations, but when it comes to the “entity handling your funds or assets, you would want your stockbroker to have an adequate net worth”, said Mehra.

“Regulators and exchanges ensure this by setting a minimum net worth requirement for stockbrokers. However, a larger net worth can indicate a more financially stable stock-broking entity,” Mehra added.