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Discount brokers came into existence in 1975 when the New York and American
Stock Exchanges agreed to abandon the minimum commission schedule previously
imposed on all members. These new, less-binding regulations encouraged the emergence
of discount brokerage firms that charged lower commissions in return for less
personalized service.
Discount brokerage houses vary widely, but almost always have cheaper fees
and commissions than full-service houses. Personal attention and specific investment
advice are generally not part of the picture, but the discount
broker usually offers convenient access to trading and customer services through
a toll-free telephone number. Brokers at discount firms are often paid relatively
more in salary and relatively less in commissions than their full-service counterparts,
giving them less incentive to induce you to trade. On the other hand, the lack
of sales incentive may make your dealings with a discount firm more impersonal,
and often you will not deal with the same individual on a regular basis.
Deep-discount brokers arose from the discount broker camp as the gap between
the discount firms and full-service brokers narrowed. Basically, deep discounters
offer the lowest commission rates along with stripped-down service. These firms
are geared to knowledgeable investors who need little hand-holding. Because
many options traders are in this category, the options market share of the deep
discounters has been growing steadily. Personalized attention at a deep discounter
may be virtually nonexistent, as may be additional features such as twenty-four-hour
customer service, bond trading, or foreign stock investing.
How Do Discount Brokers Operate?
Flat-fee listing policies. This brokerage takes all listings
at a flat rate, paying a cooperating fee on top of that amount to selling brokers.
That cooperating fee is also paid by the seller. You might see a brokerage ad
offering to list your house at a fee of $2,000. Somewhere in the tiny print,
if it's disclosed at all, will be a disclaimer that this fee is exclusive of
the fee paid to the selling broker. This type of advertising is misleading to
the consumer.
Small percentage-fee listing policies. Some brokers advertise
it will take a listing for 1% or 2%. Again, many of these brokers don't draw
attention to the fact that the selling broker, in most instances, is still paid
an additional fee by the seller.
Buyer commission rebates. You can also find real estate agents
who advertise that if you hire one of them to buy a home, the company will credit
the buyer a percentage of its commission or a flat-fee at closing. This money
comes from the fee the seller pays the broker who presents the buyer.
Graduated fee policies. These brokers offer a cornucopia of
fees and services, depending on the type of representation and work required.
For example, if you think you can sell your home without any assistance from
the listing broker, you might be able to work out an arrangement for MLS input
only. This means the broker will put your home into the multiple listing service
but take no phone calls from agents, will not show your home, nor put a sign
in the yard or advertise it elsewhere. Some MLS groups prohibit this practice,
but it is done anyway.
Reduced fees in exchange for another transaction. A few brokerages
subscribe to the theory that two in the bush is better than one in the hand.
If you agree to buy a home through the listing brokerage instead of hiring a
selling agent, many times the broker will reduce the listing commission fee.
Why Would Sellers / Buyers Accept Reduced Services?
To save money. That's the number one motivation. Some sellers are extremely
savvy about selling their own homes and don't believe they need a full-fledged
marketing campaign. Sometimes they don't. Especially if it's a seller's market.
Where Can You Find Discount Brokers?
All over the Internet. Search our nationwide directory
where you can look up each of these companies and scrutinize the services offered
to you.
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