It's important to know the difference between advisor-based, full-service brokers and more do-it-yourself discount brokers when choosing an investment account. Each of these types of brokers has different advantages, but choosing which one is best should come down to the particular needs of the investor.

Both full-service and discount brokers allow you to buy and sell stocks, bonds, mutual funds, exchange-traded funds, and other investment products. Variable factors to consider when deciding between them include the cost of commissions and fees, account opening minimum, services and features available, access to investment research and tools. Most important are the investor's preferences, knowledge, and comfort level when it comes to investing.

Full-Service Brokers

Traditional full-service brokers offer you their investment expertise, advice, and services in exchange for commissions and fees. A variety of administrative functions are supplied as part of the service. When a client approves the purchase or sale of a security, the brokerage firm executes the trade and arranges proper settlements. The firm also takes care of confirmations, statements, dividends, and income accounting, and supplying year-end tax data.

Beyond building, monitoring, and administering investment portfolios, full-service brokers also usually offer additional services and products that touch different parts of their clients’ lives. That can include personal financial planning, insurance, estate planning, retirement planning, accounting services, tax advice, and more.

The cost to the client for this full service of advice, portfolio management, and administration is higher fees, which generally run from 1% to 2% of assets managed per year. In addition, full-service firms may charge a commission fee every time a security is bought or sold.

Ideally, the advice and services you receive are comprehensive and tailored to your individual needs; this is what you're paying for.

Discount Brokers

Full-service investment firms have been around since the beginning of modern stock markets and were mostly used by the affluent who could afford them. They dominated the retail investment landscape until discount brokers such as Vanguard and Charles Schwab came along in the mid-1970s and 1980s, making investing more accessible to people with different income levels.

With discount brokers, you decide for yourself what your overall investment strategy should be, and you can choose your own stocks and bonds (portfolio management). You're acting as your own advisor and portfolio manager.

These types of brokerages sometimes offer free educational and research tools to help you with your investment decisions and may offer more advice at an additional cost. The discount brokerage will still take care of the account administration, such as executing and settling trades, providing you with confirmations and statements, and any legally required reports.

Discount brokers still may charge fees, but they're usually lower than those of full-service brokerages—often under 1%. Some of these brokers may charge higher fees while providing better investing tools, and others may charge very low fees while providing only basic investment tools.

Considerations

If you decide to take the full-service route, take some time to evaluate brokers: Aside from some knowledge of stocks and bonds, what qualifications does the broker have to give strategic investment advice? Is he or she a Certified Financial Planner (CFP)? In the area of security selection, what qualifications does the broker have to develop an effective overall portfolio? Is he or she a Chartered Financial Analyst (CFA)?

Also be aware that the trading-based commission compensation structure is sometimes seen to have a built-in conflict of interest: Is the advice given truly in the best interest of the client or is it tainted by the need to generate income for the broker? Once you choose a broker, you should continue to monitor how they're doing and decide whether or not the cost is worth it.

Another thing to consider is the minimum amount of money required to open an account at each broker. Some brokers have no minimum or a very low one, and others require thousands of dollars. These minimums vary across full-service and discount brokers.

In general, full-service brokers are suitable for investors that want a human touch and guidance and don't feel comfortable making investment decisions on their own. Discount brokers are more suited for investors who are looking for lower-cost investments and enjoy doing their investment research.

However, it's important to weigh the costs and benefits to you for each broker you're considering before making a decision. A great place to start checking the background and experience of different brokers is FINRA's BrokerCheck website.