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Whether you are an investor or not, youve probably heard of online discount brokers such as E*TRADE and Charles Schwab. Perhaps less on your radar are full-service brokers, such as Merrill Lynch and Morgan Stanley .

Full-service brokers charge higher fees for stock and ETF trades

A significant difference between the two types of brokers is the pricing per equity trade. You can buy or sell a stock for a flat fee of $9.99 or less with an online discount broker. The cost for a similar transaction could run you at least a couple of hundred dollars with a full-service broker, based on the number of shares you are trading.

One of the main reasons that a trade costs more with a full-service brokerage firm is that a licensed broker (Registered Representative ) personally handles the order. Note that online brokers also typically charge more if they directly oversee a trade; for example, a broker-assisted trade costs $34.99 with E*TRADE and $33.95 with Charles Schwab ; both add $25 to their flat fees.

Cost of research and personalized recommendations may drive prices higher

Embedded in the higher trading price is the cost of personalized, research-based recommendations. An online broker simply executes a transaction on behalf of the investor. The full-service broker formulates and presents a recommendation to buy or sell a stock (or other security) plus executes the trade.

Full-service firms often employ large research staffs that develop and compile proprietary reports on economic conditions and the investment value of specific companies stocks. Insights from this research, along with client interactions, inform brokers personalized investment recommendations. Investors pay indirectly for this advice in the form of higher commissions.

Note that recommendations must meet the standard of being suitable for clients  based on factors such as investment objectives, time horizons, and risk tolerance.

Also, brokers may be market makers for certain companies and promote a companys stock for a fee. So, you may receive a solicitation about a stock based more on the companys need to sell a certain security than its usefulness for your portfolio. Still, some stockbrokers are able to successfully match their employers (and their own) desires to generate sales and commissions while serving investors needs.

Full-service brokers focus more on managing wealth, less on executing trades

While reading about full-service brokers, I realized that many of these firms have formed teams to provide wealth management services to clients. Such services could include securities trading but may also involve financial planning, investment analyses, portfolio management, and tax advisory services.

Each team may be comprised of financial advisers with various professional certifications in addition to a license to buy and sell securities.

Notably, such teams may not charge full-service commissions on individual trades. Instead, they may charge a wrap fee. which covers a management fee (which may be calculated as a percentage of assets under management) plus trading and custodial costs. Its likely that your net worth must meet a minimum (say $500,000 or $2 million) to access such services.

Online brokers offer services with à la carte pricing

Ive noticed that online brokers have expanded their services, increasing their similarity to full-service firms. Some services are free while others carry charges using an à-la-carte-pricing model or are available only to clients with assets that surpass a certain threshold.

Like their full-service counterparts, most online brokers offer basic research and education services, which enable investors to make investment decisions on their own.

Online brokers also make investment recommendations, either through in-house resources or referrals to outside representatives. Types of services mimicking the full-service approach include:

• mutual fund recommendations
• portfolio analysis
• portfolio management

For example, you can buy mutual funds from TD Ameritrades Premier List or Charles Schwabs Select List. You can also buy pre-built portfolios or engage a professional to design a portfolio for you. Further, if you have enough assets and experience as an investor, you may be able to participate in IPOs through online brokers, such as Fidelity, Charles Schwab, TD Ameritrade. and E*TRADE.

Note that the lines have been blurred from the other direction. For example, Merrill Edge  offers $6.95 trades as the discount brokerage arm of full-service firm Merrill Lynch.

Still, differences between the full-service and online brokers  persist. A regular stock trade is more expensive with a full-service broker, ostensibly for the reason that there is much consideration taken to build, develop, and manage a clients investment portfolio.

In general, the reason for higher fees from full-service brokers are its higher-touch services for a smaller number of clients. DIY investors, beginning investors, and those with minimal assets may find the commission and fee structure of an online broker more appealing than the higher, often bundled, costs of doing business with a full-service broker.