Individual investing is a broad concept requiring a wide variety of arrangements regarding handling of one’s account. Brokerage houses include full –service firms and no – frills discounters. A full – service brokerage house offers research and investment advice, whereas no – frills discounter does not. A full – brokerage house may also offer other benefits. For example, if the firm has an investment banking department that underwrites offerings, an investor who has an account at the firm may be offered shares in these offerings, whereas investors at other firms may only be able to buy in the secondary market at higher prices. Most full – service brokerage houses offer both discretionary accounts and non discretionary accounts. A discretionary account allows the broker to order trades without consulting with the investor. Discretionary accounts are becoming rare and undesired in a world which independent investment advisers are readily available (Hamilton and Booth, 2007).
Discretionary brokers fully control an investor’s portfolio, and to make this worthwhile, the portfolio needs to be substantial. They make decisions regarding buying and selling on behalf of the investor for a fee. A trading commission might also be there. It gives the broker a reason to review the portfolio. It should not be extremely high to encourage over trading. The charges overall are lesser than on unit trusts (Davidson, 2008).
Clients of discretionary broker services would not normally expect to be consulted when corporate events take place. Advisory service clients would expect to rely on the expertise of their adviser. In time, clients of discretionary broker services may demand more evidence of their broker’s expertise in taking decisions when (non – mandatory) corporate actions occur. Users of advisory services may want to be supplied with more detail and better analysis of event situations alongside the broker’s advice (Groves, 2008).
Many discretionary brokers offer free extra services. The services include helping with capital, gains, tax and broad financial planning assistance. They allow discussion of one’s needs with the brokers. Such needs include a requirement for longer – term capital growth or a requirement for income. The advantage is that someone is doing the work for one and the costs of individual share reduce. The downside is that the stockbroker will not tell one about every transaction, although one receives regular updates. One pays a fee annually rather than pay commission on each trade. The fee has an advantage over commission in that it eliminates any temptation for the broker to chum ones portfolio – to make money from unnecessarily frequent trading. Discretionary services are often grounded on investment and unit trusts instead of individual shares (Levene, 2010).
Alexander Davidson – (2008) How to Understand the Financial Pages: A Guide to Money and the Jargon – Page 134
Francis Groves – (2008). Corporate Actions – A Concise Guide: An Introduction to Securities … – Page 95
Tony Levene -(2010). Investing for Dummies – Page 175
Robert W. Hamilton, Richard A. Booth. (2007)Attorney’s Guide to Business and Finance Fundamentals, 2nd Edition