- Schwab and other discount brokers now offer zero commissions.
- A Harvard study found that professional investors still use full-service brokers.
- On average, professionals pay $0.03 a share to trade. Here are three reasons why.
“Meet me at Del Frisco’s.”
It was a steakhouse less than five minutes from the office. It was my go-to lunch place whenever an analyst or sales rep visited.
I ate a lot of free lunches there.
Now, any economist knows “there ain’t no such thing as a free lunch.” And I knew anyone visiting me wasn’t there because they thought I was fascinating.
I paid for those lunches $0.03 at a time. That was the commission I paid on every trade: $0.03 a share.
I managed a small fund, so it added up to about $1 million a year.
It was worth every penny. In addition to some nice lunches, we got access to analysts and great execution on our orders.
Most important was the fact that we saved an estimated $0.05 per share on execution costs.
Even after paying $0.03, we benefited by $0.02. So paying $1 million in commissions improved our performance.
Today, I want to explain why a full-service broker can improve your performance as well.
Wall Street Firms Still Pay Brokers to Play
I thought of all those lunches as I read a recent study.
It’s by a couple of Harvard professors. They found that professional investors still use full-service brokers at an average cost of $0.03 per share.
Professionals manage hedge funds, pension funds, mutual funds or millions of their own money. Rather than moving to Schwab or other discounters for zero commissions, they pay $0.03 a share to trade.
I’m sure they’re all getting free lunches at nearby steakhouses. But they’re getting much more than that.
Benefit No. 1: Access to More Stocks
Brokers provide paying customers with access to more stocks. For example, they give allocations of hot initial public offerings (IPOs) to their best customers.
In other words, customers can’t flip an IPO without paying for trades every day.
If you really want the chance to buy stocks like Beyond Meat at the pre-trading price, chances are you need a relationship with the brokers who manage the IPO.
No discount brokers were involved in that IPO.
Uber included 29 brokers in its IPO. Again, no discounters made the cut.
Benefit No. 2: Low Trading Costs
While IPO access could be enough of a reason to use a full-service broker, another reason to have one is because it really doesn’t cost that much.
The chart below shows trading costs have been consistent since 1940.
(Source: “A Century of Stock Market Liquidity and Trading Costs”)
This chart shows trading costs in percentage terms. It’s for the market as a whole. But the point applies to any investor.
Trading costs include more than commissions. How the broker completes the trade is the most important cost.
This chart shouldn’t surprise investors. It shows that as commissions came down, Wall Street found other ways to make money on trades.
Benefit No. 3: Professional Research
Finally, full-service brokers offer access to research.
Banyan Hill writers all access professional research and incorporate that into their work.
We all understand that when it comes to beating the market, you must pay for a seat at the table.
That’s why I joined Banyan Hill: To help readers like you keep up to date on the latest information and get ahead of the crowd.
Editor, Peak Velocity Trader
P.S. Last week I discussed the Federal Reserve’s latest rate cuts with Jeff Yastine. You can watch our conversation by clicking on the video below: