(by Julia Jenson)

As the advertising palette of brokerage firms sparkles with the rainbow of opportunities, and media columns sizzle with intimidating reports of brokers’ abusing naive clients, it is important to stick to objective criteria when choosing the advisor that will provide you access to the world of securities and possibly steer you out of danger and towards profit.

1. The most important distinction to realize is the difference between full-service and discount brokers. While full-service firms represented by such household names as Merrill Lynch, Smith Barney, UBS and Morgan Stanley offer a more or less wide spectrum of services, true cheapies like OptionsExpress, Muriel Siebert, Ameritrade or Scotttrade offer competitive commissions and fees but little other than trading. This clear-cut division has been diminishing of late however, with the appearance of an intermediate layer of premium discount brokerages like Fidelity, E*Trade or Charles Schwab that offer investing advice but charge a little more than the true discounts. Going online will likely become a standard feature of virtually any broker following the creation of Merrill Lynch Direct for online trading.

2. The choice between online trading usually associated with discount firms and having a live broker to chat on the phone with is another basic choice. Plunging independently into the online trading is a cost-efficient option for a savvy and confident investor. At a full-service firm a trustworthy personal advisor can help you balance your portfolio, an advantage not to be neglected in today’s volatile market.

3. Good service seldom comes cheap, and the price includes several factors, such as commissions on different types of orders, maintenance fees, margin rates if you plan to buy on margin, inactivity fees, and incidental fees charged by various companies. It is also worthwhile checking whether the broker charges a fee on no-load funds and how high the money market account yield is compared to other brokerages. Some firms like Charles Schwab offer a somewhat bewildering but definitely broad account spectrum with commission and fee structure varying depending on the trading activity, asset level, banking options and the tax status of the account. If you are unable to sort out what is the best bargain for you personally, you can ask the rep to help you. Also find out the minimum balance to open an account. Transferring money out of your account can also cost you about $50 even at the cheapest places like Ameritrade or BrownCo.

To give you an idea of the commission range, compare the standard commissions of the premium discounts ranging from $32.95 at Fidelity to $19.95 at cheaper USAA and T. Rowe Price, to the real bargains at Scotttrade and Firsttrade (approximately $7) and BrownCo ($5). True, most of the premium discounts lower their commissions for frequent traders or those with a certain minimum asset balance. Thus, USAA charges only $14.95 if your assets are over $25,000 or you make at least 16 trades per quarter. Fidelity and Charles Schwab also offer much better deals if you are over $100,000. With higher asset level you also get better research, different team of brokers and even a different toll-free number.

4. One more issue is the menu of securities you are able to choose from. You should consider the scope of their offerings since not all the companies have a good selection of all the stocks, bonds or mutual funds you may be interested in. You cannot trade bonds or options at the American Express and some others while OptionsExpress started out as a specialized options broker. T. Rowe Price may be a good choice for fund fans since they boast a wide assortment. Ameritrade boasts the largest number of funds in the discount category: 3,000. Also, beware of the brokers that charge you a commission on some or all no-load funds. And even more, of those that steer you towards loaded ones in order to obtain their fee even if they do not meet your investment goals.

5. This brings us to perhaps the most important point: your broker’s ethical code. This ephemeral entity has a quantifiable expression…

(to be continued)