The Daily Dow
Tuesday, June 10, 1997
by Robert Sheard (TMF Sheard)

LEXINGTON, KY. (June 10, 1997) -- A reader recently asked me a question that hasn't come up in a while, so I thought it might be time to revisit the debate about full-service versus deep-discount brokers.

We all know how much lower the individual trade commissions are with the deep-discount brokers, as low as $10 a trade at a handful of the very cheapest. But some full-service brokers want us to focus on the other trading cost not advertised in those low-ball claims: the spread between the bid and the ask.

Some full-service brokers suggest that the investor will come out better, even after paying the higher commission because the big Wall Street firms can get better execution prices when the order sails through.

Oh really?

First of all, I have yet to see any credible evidence that they do, in fact, get their clients better prices on stocks, but let's assume that they really do.

You've decided to buy 200 shares of COCA-COLA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KO)") else Response.Write("(NYSE: KO)") end if %>. With a bid price of $68.25 and an ask price of $68.375, the entire spread is only 12.5 cents per share, a typical spread on very liquid stocks like those in the Dow.

Through a deep-discounter, you purchase the stock, get the ask price, and pay a $10 commission. Your total investment in those 200 shares is $13,685.

Even if the full-service broker gets you the bid price (which I still don't believe to be the case), you lose out. The 200 shares of Coke cost you $13,650 and you're likely to pay a couple hundred for the commission.

You would have to be investing enormous amounts at that differential before you'd break even going through a full-service broker, most of which have a sliding commission scale, so your commission would get larger the more shares you bought. So unless the full-service brokers are going to get you the stock at a price below even the bid price, don't buy the line that you make up for the higher commission with better prices. The numbers simply don't add up, even if they really do get better prices, an issue that's still not demonstrated to my satisfaction.

It's just the old guard nervous about the loss of turf they're seeing result from the individual investor revolution. Fool on!

(c) Copyright 1997, The Motley Fool. All rights reserved. This material is for personal use only. Republication and redissemination, including posting to news groups, is expressly prohibited without the prior written consent of The Motley Fool. ________________________________

Stock  Change   Last
--------------------
T    +   1/8   36.25
GM   +   1/2   57.50
CHV  +1  1/2   73.38
MMM  +1  7/8   94.63

               Day   Month    Year
        FOOL-4   +1.20%   1.26%   1.69%
        DJIA     +0.81%   2.84%  16.92%
        S&P 500  +0.27%   2.00%  16.81%
        NASDAQ   -0.74%   0.10%   8.57%

    Rec'd   #  Security     In At       Now    Change
   1/2/97  120 3M            83.00     94.63    14.01%
   1/2/97  153 Chevron       65.00     73.38    12.88%
   1/2/97  179 Gen. Motor    55.75     57.50     3.14%
   1/2/97  479 AT&T          41.75     36.25   -13.17%


    Rec'd   #  Security     In At     Value    Change
   1/2/97  120 3M          9960.00  11355.00  $1395.00
   1/2/97  153 Chevron     9945.00  11226.38  $1281.38
   1/2/97  179 Gen. Motor  9979.25  10292.50   $313.25
   1/2/97  479 AT&T       19998.25  17363.75 -$2634.50


                             CASH    $609.53
                            TOTAL  $50847.16