Most of us spend a lot of time trying to figure out how to shave a bit off the cost of just about everything we buy. You can even shop price for a stockbroker, opting to use a discount broker instead of a full-service broker to execute your transactions.
But market experts suggest that before you choose a broker based on price alone that you take an inventory of your needs and do some strategic financial thinking.
The first question to ask: Do you need limited help making stock decisions, or do you want comprehensive guidance?
If you have a pretty good understanding of the market and what you want, and simply need someone to execute a trade, "then we tell our members to use a discounter," said John Markese, director of research for the Chicago-based American Association Individual Investors. "They can execute your transaction, and you'll only pay for the cost of that service."
But if you need specific expertise, for example if you are trading in options or want help in structuring a diversified portfolio, he said, then use a full-service broker.
A full-service broker will have its own research department. Some regional firms, for example Dain Bosworth Inc., do in-house research only on regional companies. But they have access to top-notch opinions from other brokerages, like Goldman Sachs and First Boston, which they provide to clients.
Merrill Lynch & Co. has the world's largest research organization of some 1,400 companies. "And access to that expertise is included in your fees," said Bill Henkel, Merrill's vice president, quality assurance group.
Charles Schwab & Co., the largest of the discount brokers, with 1.5 million active accounts and 45 percent of that segment of the market, doesn't do its own research. But it will do research for its clients for a fee, said Tom Taggart, a spokesman for the company. For $12.50, it will prepare a 12 to 14-page Investment Profile Report, which it will mail or fax to you.
The full-service brokers stress service. Mr. Henkel said Merrill Lynch is selling financial consultants who offer a broad range of advice, guidance and information.
"They know about fixed income, stocks, insurance, annuities. The first thing we do is a comprehensive inventory of a client's financial needs to try to fit the best long-term plan. That's our most important service," Mr. Henkel said.
Schwab, on the other hand, has a policy of "not telling people what to do," Mr. Taggart said. "We don't make recommendations because we find they want to make their own decisions."
Schwab and other discounters hold down prices by paying their brokers a straight salary rather than putting them on commission. That way, Mr. Taggart said, there is no motive for them to urge you to make unnecessary trades.
But be aware that trading through a discounter isn't cheap. They charge a wide range of fees, and the only way to figure how much you will save is to look at your own trading patterns -- including frequency and size of trades -- and compare them to the fee schedules that most discounters publish.
Do some homework:
* Look at several brokerages and their fees. Compare rates and range of services offered.
Many brokerages -- discount as well as full service -- charge a minimum commission rate, which means you will pay at least that amount for any trade.
* Determine how your brokerage sets its rates. Some use the dollar amount of the transaction, some base it on the number of shares. The rate also can vary depending on the type of security traded. In other words, it may cost more to execute an options trade than it does to trade stock.
* Some firms offer rebates or discounts based on volume of trades. But be careful, warns the Better Business Bureau of Metropolitan New York. The highest savings may apply only to very large transactions. On some small trades, a "discount" commission may be higher than a full-service commission because of the minimum rate for small lots.
* How often do you get a statement of the activity in your account? What is included in the statement: balances, stock positions, dividends and interest earned? Some only mail this quarterly, others do it monthly.
The same criteria can also be applied to full-service brokerages.