Discount brokerage firms are stockbrokers that execute buy and sell orders for investors at an affordable rate, but do not provide the same services as a full-service brokerage.
What Is a Discount Brokerage?
A discount brokerage is an organization that facilitates securities trading at a lower cost than a full-service broker. Discount brokers typically offer their services online, where investors can open accounts and place trades for an affordable fee.
Services Discount Stockbrokers Provide
Since discount brokers offer low (and sometimes zero) commission trades, they typically do not provide investment advisory services like a full-service broker. However, many discount brokerages provide investors with the convenience of online access, a range of investment accounts and securities to choose from, and tools to help evaluate and monitor investments.
Examples of the services discount brokers provide include:
- Online and mobile access to accounts.
- Trading for a range of securities, including stocks, ETFs, and mutual funds.
- Low fees and (sometimes) zero commission on stock trades.
- A variety of investment accounts such as taxable brokerage accounts, IRAs, and education savings accounts.
- Investing tools and mobile apps to monitor performance and market activity.
Discount Broker Fees
Discount broker fees vary depending on the broker. Many discount brokers charge no fee to open accounts or transfer money in. Zero commission trading is also common for popular stocks and ETFs.
Typical fees for a large discount broker are:
- $0 fees to open a new brokerage account
- $0 direct commission for listed stocks and most ETFs
- $0 to $75 transaction fee for mutual fund purchases
- $0.65 per options contract
- $2.25 per futures contract
Note: Just because a discount broker doesn't take commission does not mean they're providing services for free. In many cases, these brokerages make money by selling client data or in other ways that may not be readily apparent.
Premium Discount Brokers with Assistance
While zero commission trading is common for stocks and ETFs, many of the larger discount brokers, such as Charles Schwab and TD Ameritrade, also provide broker-assisted trading for a fee, which is typically $25 per trade. This is helpful for some investors who want to ensure that their trade is entered and executed as intended.
Full Service Broker vs. Discount Broker
The primary difference between a full service and discount broker is fees. Both types of brokers execute buy and sell orders for clients. However, in addition to trade execution, full service brokers generally offer investment advice for a fee or commission.
While it may sometimes seem like a discount broker's services are free, they can make money in ways that may not always be apparent. For example, discount brokers typically keep held cash in sweep accounts that pay near nothing to the investor. Brokerages can then lend out this money and make what is called "net interest." This can add up to billions of dollars per year for a large brokerage like Charles Schwab or Fidelity Investments, which have trillions under management.
A misconception about full service brokers is that they only provide their clients investment advice and trade execution. However, full service brokers may provide a number of additional services, including portfolio analysis, tax planning, estate planning, access to IPOs, and more efficient access to foreign markets.
Pros & Cons Of Using A Discount Brokerage
Discount brokers can be a good choice for many do-it-yourself investors, but they may not be right for every investor. Before working with a discount brokerage, investors should consider the pros and cons.
Pros
- Low fees: Discounted fees and zero commission trades on stocks and ETFs are a primary advantage of discount brokers.
- Client-centered: Brokerage services are generally aimed at offering investors tools, rather than selling financial products.
- Educational tools: Many of the larger discount brokerage firms provide tools and apps to track portfolio holdings and market data and research investments.
Cons
- Limited personal advice: Discount brokers are ideal for do-it-yourself investors, but beginner investors may find the lack of guidance and human assistance a negative factor.
- Hidden fees: Discount brokers offering zero commission on stock trades may seek fee revenue from other sources, such as their proprietary investments, and transaction fees for trading a competitor's proprietary investment. They may also sell information regarding investment decisions to other companies.
Top 3 Largest Discount Brokers
The three largest discount brokers, as measured by investor assets held in brokerage accounts, are Charles Schwab, Fidelity Investments, and E*Trade. Schwab and Fidelity have significant assets, such as proprietary mutual funds and ETFs, beyond their brokerage services. E*Trade has an advanced and consumer-friendly trading platform.
- Charles Schwab: Founded in 1971 and headquartered in San Francisco, CA, Schwab had $4.4 trillion in assets held by retail investors in 2021, according to their annual report or aboveschwab.com.
- Fidelity Investments: Established in 1946 and headquartered in Boston, MA, Fidelity reported $4.5 trillion in discretionary assets held in 2021. Fidelity may be best known as a mutual fund company and retirement administration firm but their discount brokerage is a key piece of their business, as total assets under administration for Fidelity is $11.8 trillion.
- E*Trade: Founded in 1982 and headquartered in Arlington, VA, E*Trade is the largest discount broker built primarily by its electronic trading platform, as opposed to other brokerages that built assets by multiple means, including proprietary investments. Acquired by Morgan Stanley (MS) in October 2020, when E*Trade had over 5.2 million client accounts with over $360 billion of retail client assets.
Bottom Line
A discount brokerage executes buy and sell orders for investors for a discounted cost. However, unlike full service brokers, discount brokers don't offer the same number of services.
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
