Discount Broking has taken the stock trading industry by storm as the confluence of better technology, digital regulations, neutralizing regulatory norms and awareness have created the perfect playground for this massive disruption across the globe. So whats the difference between a full service broker and a discount broker and which one is right for you?
Trends
The genesis of discount broking is in the need of casual traders in the US who wanted better access , on the move convenience and low per trade brokerage or intraday traders for whom a brokerage account was one of the many services required from their provider. Players in the US like Schwab , Zecco etc in the 1990s and 2000s experimented with multiple models till settling on a per order or per trade basis flat brokerage charge which then became a virtual global phenomenon and recently was adopted by the likes of eTrade, TD Ameritrade and so on. Similar to how it evolved in India from the late 2010s with prepaid cards then culminating in fixed brokerage kind of models.
The Covid crisis spurred interest in this segment and the rest is history!
So why Full Service Broking
A lot of potential clients come back asking us why full service broking when they could make do with discount broking? It’s a question similar to why I should pay a doctor when I could go to a pharmacy and buy my own meds – both co exist during a persons lifespan and both have their own place in your “portfolio”! Imagine doing a self diagnosis during a health crisis – would the local friendly pharmacist be your best option as the port of first call?
If one is a very small or infrequent trader, a discount broker is the best place to be – no doubt about it – as the brokerage on such trades with a broker may easily be double or more of what you pay. However, if you are on a journey of wealth creation, the discount broking app may just be one of the things you have on your mobile and not the key to prosperity!
Let us tell you how!
Merits of Full Service Brokerage
First of all, remember – when you deal with a full service entity, you are not dealing with a stock broker! You are dealing with an entity that can help you by way of advice and handholding across products and services that suit your risk profile – from simpler things like mutual funds to the complicated world of Alternative Investments and Structured products. What should matter here most is not the costs but the risks and returns over your lifecycle – remember, no ones going to ask you how much brokerage you saved when you are 50 but one may want to know how much wealth you created!
The hours and years that it took your advisor to become good at what she does didn’t come free either – certifications and experience taught the person to be sensitive to your needs and give you advice that helps you protect and create wealth. This cannot come free.
Second, while (some) discount brokers are an excellent place to be, given their insistence on quality of service and technology, not all discount brokers are equally adept at handling the new challenges that come technology. When you place your trust on an online discount broker, do check whether the broker has best in class disaster management systems – a breakdown in service could be calamitous and you may not be able to reach anyone beyond a toll free number and a social media account! So do your research well when you choose a discount broker – there are the ones who have global abilities of handling technology and those who may just be replicating the model without investing enough in quality of standby facilities.
Third, discount brokers don’t come cheap! One needs to see how much a simple “0.05%” per day in delayed payment charges – sounding innocuous, for example on debits. comes to annually (do pick up your calculator and do the math). This may matter to you a lot if you are regularly working on debits as the interest component on your account may easily be 3%-5% more on debits than a full service broker. Not that anything wrong – a discount broker doesn’t know its clients so cannot differentiate and may not have collections staff – so it makes sense.
Check the charges on the demat transactions as well. At times you may be surprised how much more you are paying than your friendly full service broker. Or the per call charge levied on your call and trade orders.
When you are delayed in making payments, your full service broker brings the heavens down on the headquarters of the entity to ensure your stock isn’t sold. Of course you didn’t mean to not pay, its just that you needed a couple of hours more to do so and the broker accommodated you. Or sends a person to your home to collect a cheque. He then discusses alternatives- loans against shares, Margin Funding and so on and then advises you on how to better manage your portfolio investing so such things don’t recur. Of course, also check the brokerage that the discount broker charged you when it sold your shares.
Of course, and very important is the fact that if your discount broker is not allowing you to buy on debits, he is keeping cash upfront in his account (unless it’s a bank broker in which case this may just be a block- but do check how it works at your broker). What happens to the interest you lose on keeping this cash with the broker when you don’t use these funds?
When your favourite mutual funds or stocks undergo price corrections and you need decisions or when you are planning to save for specific goals and need an overview of what all you can do over a cup of coffee, where would you turn to? Of course you could pore over hundreds of articles and research reports and spend time deciding and then executing on an app (provided it allows multiple investing options) or you could simply call the full service broker who would gladly educate you via its certified and experienced advisors at your home.
And of course, there is the matter of personal presence. A full service broker like Prabhudas Lilladher can be reached at more than 1100 locations across India today physically apart from via electronic means and toll free lines. Its just that bit more of a comfort to see human beings at times of a crisis right? Especially if you have more money at stake and possibly aren’t comfortable with technology?
There is a price for customisation – just ask the guys at Rolls Royce! Or your neighbourhood doctor or restaurant. The same principles apply here!
So what should I do?
In our mind, there is nothing wrong with keeping a discount brokerage account handy on your app just like the other apps you have. It comes very handy when you want to do quick trades OR large trades and you don’t need advice.
However, if you are like the millions of Indians who are beginning their wealth creation journey (and it cant be done with free tips on whatsapp and Telegram messengers), do open a full service broking account as well. Evaluate what kind of person you are – focused on guided investing and saving or a self trader and whether you would need diversification and multiple investing options or just some trades- and bifurcate your order placements accordingly. Remember to also calculate the costs when you do it so you realise the premium or the discount you are paying.
Conclusion
At the end of the day, what you choose to do depends on you. Its not about the pricing of one broker or the other nor about how young or old you are. Its also not about choosing this or choosing that.
The only persons who have this choice clearly made for them are the very large self traders (including algo traders as they don’t have some of the above costs or issues) or the casual , very small or intraday traders (as brokerage is the only relevant matter). They should opt clearly for discount broking.
For the rest of us, who want advice on making money at acceptable risk and protecting wealth from the worst shocks, both may be important.
Nothing wrong with selecting a discount broker or a full service broker- Its about what you need out of the financial markets for the rest of your life!
If you’re a new investor open your demat account for free with Prabhudas Lilladher to begin your investment journey.
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