Is a full-service brokerage for you?

Despite recent bad publicity, major brokerage houses still provide valuable assistance that discount and online brokers don't. Here's how the big players compare.

Is a full-service brokerage for you?

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Choose article section...First, look at returns and quality of research Choice of accounts gives you more options Individual money management can be a potent lure Online services make your life easier Getting the most from your brokerage Brokerage Web sites and phone numbers

Despite recent bad publicity, major brokerage houses still provide valuable assistance that discount and online brokers don't. Here's how the big players compare.

By Leslie Kane
Senior Editor

If you'd rather wrestle an alligator than construct your own investment portfolio, then you're among the millions who may prefer a full-service brokerage to a discount firm. "Full-service brokers cost more, but many investors are willing to pay so they can leave the work and decisions to experts," says Mitch Zacks, vice president of Zacks Investment Research, a Chicago research and money management firm that tracks returns of major brokerage houses.

You pay a low set fee per trade with a discount brokerage, but you get fewer services and little or no advice. With a full-service firm, you can choose from a broad menu of services and establish a relationship with one of the firm's brokers. Besides offering guidance, the broker may be able to suggest opportunities you'll never hear about otherwise, such as IPOs that his firm is underwriting and private investments (known as alternative investments) available only to brokerage customers. Instead of paying a per-trade fee, you'll likely pay an annual fee based on the size of your account.

In some ways, choosing a full-service brokerage is easier than it once was. You have fewer firms to choose from than in years past, due to industry consolidation. Morgan Stanley merged with Dean Witter, for instance, and Salomon with Smith Barney. In addition, the major national firms tend to offer similar services to stay competitive. But some differences in investment expertise, account options, and service remain.

To help you sort them out, we looked at five leading full-service brokeragesMerrill Lynch, Morgan Stanley, Prudential Financial, Salomon Smith Barney, and UBS PaineWebber. Here's a sampling of what they offer.

First, look at returns and quality of research

Investment performance is perhaps the best indicator of a brokerage's expertise. Unfortunately, there's no way to compare overall investment performance among brokerages. You can, however, compare the returns of each firm's key equity choices.

"A committee in each brokerage decides on core stocks to recommend," says Zacks. "Although your broker will pick some equities individually for you, several of the firm's core stocks will probably end up in your portfolio." Virtually all major brokerages' core stock picks posted negative one-year returns in 2001 (as did the S&P 500, which returned 11.9 percent). However, Merrill Lynch fared best of the firms we reviewed: It returned 2.6 percent, compared with 6.7 percent for Salomon Smith Barney, 13.7 percent for UBS PaineWebber, 19.4 percent for Morgan Stanley, and 22.5 percent for Prudential Securities, according to Zachs Investment Research.

Merrill Lynch's core picks also outpaced the other brokerages' over five years, with an impressive 81.2 percent gain. Prudential Financial followed with 52.0 percent, Morgan Stanley with 43.7 percent, and Salomon Smith Barney with 24.6 percent. (No five-year return was available for UBS PaineWebber).

Another measure of investment expertise is how each firm's proprietary mutual funds perform. Prudential Financial and Merrill Lynch have more proprietary equity funds than the others, and both groups' funds have strong track records for beating their benchmarks. Ultimately, good returns depend on sound research, and several brokerages have received kudos for their research capabilities.

Merrill Lynch's research was the most widely read in 2001, based on a worldwide study of more than 40,000 institutional money managers conducted by Thomson Financial Services, a financial research firm in New York.* Salomon Smith Barney and Merrill Lynch both placed strong in Institutional Investor magazine's All-American Research Team for 2001, which was picked via a poll of more than 780 financial institutions.

In another survey by the Wall Street Journal, UBS Warburg (UBS PaineWebber's sister company and research source) ranked first in terms of earnings estimates and stock-picking accuracy. In the international arena, Morgan Stanley has a strong reputation. The Morgan Stanley Capital International stock indexes are used as benchmarks for international equity and mutual fund performance.

A word of caution, however: No matter how strong a brokerage's reputation for sound research is, don't make the mistake of taking every investment recommendation at face value. As always, it's important to carefully evaluate the research and reasoning behind any prospective investment and remain alert for input from other sources or a vested interest in a given recommendation. Merrill Lynch, Salomon Smith Barney, and Morgan Stanley are all among the brokerage firms that have come under fire for publicly touting stocks of investment-banking clients while privately slamming the stocks, many of which later plunged. The onus is on you to evaluate your broker's knowledge, too, since that also helps determine your portfolio's performance.

Look, too, at the training the brokerage firm provides for its employees. In recent years, brokers have been reincarnated as financial advisers. Now, they not only recommend specific investments, but they construct whole portfolios and draw up overall financial plans. Still, a brokerage-based adviser's focus is investing, and he often executes your trades. So you want someone savvy.

Each brokerage seeks adviser candidates with financial backgrounds and further trains them. Merrill Lynch financial advisers receive periodic training during their first five years with the firm, says the brokerage's Eric Hendrickson. "We give additional training to advisers who work with wealthy individuals with complex needs," he adds.

At Salomon Smith Barney, the training program takes place in four-week sessions over a two-year period. "Each adviser apprentices with a full-time broker before meeting clients individually. Advisers are seasoned and are not learning on the client's account," says Andrew Koerner, a first vice president based in New Brunswick, NJ.

Choice of accounts gives you more options

It's wise to look for a broker with several account options. Services offered, fee structure, level of advice, and the amount of attention you'll get will vary, depending on the type of account you choose. You might want to start with a basic account, and as your balance grows or your investing goals change, you can switch to another type.

All five brokerages offer a basic "everything" account that lets you trade, pay bills, write checks, and earn interest on money in the account. Most provide a free debit card. You'll normally pay a fee for each stock or mutual fund sale or purchase.

The next step up is a general brokerage account, which is primarily for investing and trading. Rather than per-trade commissions, you pay a fee that's based on the size of your account and kicks in on a sliding scale. So if you're an active investor rather than a buy-and-hold type who makes only a few trades a year, this type of account may prove more economical in the long run.

In Morgan Stanley's Choice account, for instance, the cost is 2.25 percent annually for balances of up to $100,000, if you're trading individual stocks. That charge starts dropping when the account balance reaches $250,000. For mutual fund trading, fees start at 1 percent and descend from there. (Any loads or other fees charged by the funds themselves are additional.) Morgan Stanley, Merrill Lynch, and UBS PaineWebber each offer two general brokerage accounts, each with slightly different benefits and fee structures; Salomon Smith Barney and Prudential Financial have one each.

In all these brokerage accounts, you can place orders yourself online or have your financial adviser do it for you. The brokerages also offer specialized accounts geared toward specific investment needs; Merrill Lynch leads the pack in variety. If you invest in mutual funds rather than individual stocks, for example, you might want to consider the fund-based account offerings at Merrill Lynch, UBS PaineWebber, and Salomon Smith Barney. The managers of Merrill Lynch's Mutual Fund Advisor Program not only select the funds for you, but buy and sell shares on your behalf as they see fit.

With the UBS PaineWebber PACE (Personalized Asset Consulting and Evaluation) program, the managers help you choose funds and adjust the amount in each fund annually to maintain your original asset allocation, but you make the decisions and, if you prefer, execute the trades yourself. To pick funds yourself, with guidance from an adviser, you might also look at Salomon Smith Barney's Trak Personalized Investment Advisory Service.

Individual money management can be a potent lure

Individual money management is a hallmark of full-service brokers. If your account is hefty enoughusually at least $100,000and you want someone to take complete charge of your portfolio, consider an individual money manager, whose sole investment focus is your portfolio. While your initial contact, the financial adviser, is a generalist who can offer some investment recommendations and help you develop an overall plan, a private manager is strictly an investment specialist. He'll choose the individual stocks or other securities that best fit your goals and risk tolerance. These managers often invest for institutions; most investors would have access to them only through a large brokerage.

"Most wealthy people keep their money in individually managed accounts, which are superior to mutual funds," says Zacks. "With mutual funds, you pay tax on fund distributions, even if returns are down, and your money gets pooled with cash from other investors. With an individually managed account, your money stays in your own account. The manager consults with you to hold or sell stocks to reduce tax consequences. Another advantage is that if you have, say, a concentration of health care stocks in your company retirement plan, your money manager can avoid those stocks in your taxable account to increase your diversity."

You'll qualify for individual money management more easily at some brokerages than others. At UBS PaineWebber and Morgan Stanley, you can get separate account management with a minimum investment of $100,000. Merrill Lynch requires a $250,000 minimum investment for separate management.

Online services make your life easier

You can access your account and make trades at each brokerage's Web site. (At UBS PaineWebber you can only make trades with certain fee-based accounts). You can also get research, stock quotes, financial news, and analyst reports. Some information is available to all users; some is accessible only to account-holders. Some brokerages' Web sites, such as Morgan Stanley's and Salomon Smith Barney's, offer excellent instructional material about investing. At Salomon Smith Barney's Web site, click on Investor Education under Services. At Morgan Stanley's, look under Individual Investors.

As far as costs go, you won't find large differences among the brokerages. "The fees are basically the same across the board at most firms," says Erik Hendrickson, with US Private Client Services at Merrill Lynch. Finding an adviser or money manager you can click with is perhaps the biggest key to satisfaction with any firm.

"Every company probably has some aggressive brokers and some low-key ones," Zacks says. "Much of your experience at a firm depends on your broker's personality and how much you invest. If you qualify for private client services, you'll get more personalized attention and may feel more positive about that brokerage."

*Thomson Financial Services and Medical Economics magazine are both owned by Thomson Corporation, headquartered in Stamford, CT.

Getting the most from your brokerage

When choosing a brokerage, you have more flexibility than you might think about whom you'll work with and what you'll pay. Make an appointment to talk with more than one adviser. Pay attention to how your personalities mesh.

"At some firms, brokers advance their careers because they're very aggressive about getting you to invest more, and putting you into certain types of investments," says Mitch Zacks of Zacks Investment Research, a Chicago research and money management firm. "Be sure you're comfortable with the brokers' style."

If you don't click with one adviser but you like what his firm offers, ask the branch manager if you can meet with another adviser before making a decision.

If your broker/adviser will be making trades for you at his discretion, you'll want to be extra careful. "Before putting money with a broker, check his Form U-4 (Uniform Application for Securities Industry Registration or Transfer), which will tell you if he has run into trouble with other clients," says Zacks. Check this information through the NASD's Public Disclosure Program. Visit the Web site at www.nasdr.com or call the public disclosure hotline at 800-289-9999.

It also helps to choose an arrangement that aligns your broker's interests with yours. "If you're using a broker, never choose an account that charges only transaction fees," says Zacks. "With those accounts, your broker benefits the more you buy, and his interest may run counter to yours. Recommendations can be biased, and analysts are more likely to tell you to buy a stock than to hold or sell. Look for an asset-based management fee, which charges a set percent of your investments, no matter how often you buy or sell."

And, like buying a car, you can sometimes bargain for a better asset-based fee. "If you're going to have individual money management, negotiate the asset-based rates before you commit to a broker," says Zacks. "Talk to brokers at several firms, and let each one know that you're talking to others. See who will offer you a lower rate.

"Money managers may also charge you a lower fee if they know that you have additional assets to invest in the future, or if they believe that you have wealthy friends who may become clients," says Zacks. "If that's the case, use it to your advantage."