Full-Service and Discount Brokers: What Actually Differs

A full-service arrangement puts several things inside the middle: research for clients, a named person who can be telephoned, help with the paperwork, and sometimes a view on what to hold. A discount arrangement keeps three and adds nothing: carrying the order, keeping the record, standing behind the obligation. The charge usually changes shape with the contents, from a share of order value to a flat amount per order.

A comparison that opens on the difference teaches the difference and nothing else. So begin with what the two have in common. Whichever arrangement a client signs with, the same irreducible job gets done. The client's order is carried into a venue on a membership the client does not hold and could not obtain in order to buy ten shares. Neither arrangement invented that job and neither can decline it. The shared job is the reason either of them exists at all, and it is why a party admitted to a venue's rules and permitted to send orders into it, a trading memberA party admitted to a trading venue's rules and permitted to send orders into it. The conditions for admission are set by the authority named below., has to be standing between the client and the screen.

Everything the two arrangements disagree about is stacked on top of that job. Which is why the honest question is not which one is cheaper. The honest question is what each of them has decided to put inside the middle, and the price is a consequence of that decision rather than the decision itself. Both arrangements are defined in full below before either is set against the other. Somebody who arrived on the word discount may not yet know what the other thing is, and being told the difference between two things that cannot be described is not learning.

What is a full-service arrangement, on its own terms?

Described on its own, with no mention of anything else, a full-service arrangement carries the client's order the way any arrangement does. Around that carrying it puts four more things, and it is worth having them as separate items rather than as a mood.

Research written for clients: notes, views and summaries, produced by people the arrangement pays, handed to the client because the client signed with it. A named person: somebody whose telephone number the client has, who can see the account when the client calls, and whose job description includes picking up. Help with the paperwork: getting money in and out, getting securities in and out, chasing the form that came back rejected on a Friday afternoon. And in some arrangements, a view on what to hold. The fourth item carries the most conditions and the least freedom in how it may be offered.

The client is buying a bundle, and the carrying of the order is one item in that bundle, usually the cheapest of them to provide. The last clause inverts what most people assume. The item a client thinks the payment is for costs the arrangement the least. The items that barely register are the ones with salaries behind them. Research is people. A named person is a person. Paperwork help is a person. Carrying an order is a message.

The everyday version: a full-service arrangement is the neighbourhood tailor who takes the customer's measurements, suggests the cut, talks the customer out of the wrong collar, alters the sleeve twice after a change of mind, and stitches the shirt. The stitching is what the customer walked in asking for. The other four took his afternoon, and the bill is mostly made of those four.

What is a discount arrangement, and what does it keep?

A definition assembled out of absences teaches nothing at all. So define this one by what it keeps and never by what it drops. A discount arrangement holds on to three things, and remove any one of the three and nothing works.

A discount arrangement carries the order to the venue, under its own membership, exactly as the other arrangement does. The arrangement keeps the record of what the client holds and what the client owes. Somebody has to know where the client stands between the moment of buying and the moment of selling, with the securities themselves sitting in a depositoryThe institution holding securities in electronic form against a name, so a transfer becomes a change in a record rather than a movement of paper. Covered separately. rather than in anybody's cupboard. And it stands behind the obligation to the venue. The third item is the one most readers have never once thought about, and the one the venue cares about more than any other.

Carrying, recording and standing behind are the irreducible middle, and an arrangement holding only them is not a cut-down version of something else, it is the whole job with nothing added. The word discount invites exactly the wrong reading. Read the three as an equality rather than as a subtraction. Nobody took anything out. Somebody built the job and then stopped building.

The street version, and it is closer than it looks. A courier who collects a parcel, writes down that he has it, and is answerable if it fails to arrive is doing the whole of a courier's job. He is not an incomplete travel agent. Judging him against a travel agent produces a long list of things he does not do and not one useful sentence about whether he is any good at carrying parcels.

What is actually inside the middle in each case?

Now put the two side by side, as two lists against the same headings rather than as a paragraph of comparison. Prose hides which rows match. A table cannot.

The top three rows read identically, and the match is the only reason these two arrangements can be compared at all. Every row beneath them is a decision somebody made about what belongs in the middle. The comparison has no other structure. If the top three differed, these would be two different businesses and the word broker would be doing two jobs. Because they do not differ, this is one business with two answers to a single question: what else goes in the box.

The last row is worded carefully. Whether a view on what to hold may be offered at all, and by whom, is not a feature an arrangement picks off a menu. Offering one is a condition, and the condition is set by the Securities and Exchange Board of India (SEBI) at sebi.gov.in. Implying that every full-service arrangement hands out views on what to hold would teach a reader to expect something that may simply not be on offer. Teaching nothing would be the better outcome.

Why does the shape of the charge follow the contents?

Two shapes turn up over and over, and each of them is a statement about work. A charge struck as a share of order valueThe price multiplied by the quantity on a single order, before any charge is added. Order value is a base that a rate is struck on, not a charge in itself. says the work rises with the size of the order. A flat amount for the order says it does not. Only one of those can be closer to what actually happens, so work out which.

Go through what is left inside the middle once research and a named person are out of it. Carrying a message to a venue. Keeping a record of what changed. Neither of those costs more because the number written on the message is larger, and that is the whole argument for the flat shape. A message reading ten shares and a message reading ten thousand shares travel the same distance, take the same instant to write down and occupy the same line in the same record.

One item in the middle does genuinely get larger with the order, and it is worth naming rather than glossing. On a bigger order, what is being stood behind is bigger. Standing behind the obligation to the venue is therefore a bigger thing to do. But that is one item out of three, and what an arrangement must put up against it is set by SEBI at sebi.gov.in and is not written out here.

None of this makes one arrangement better than the other. The shape of a charge is evidence about what is inside the middle, and it is not a verdict on whether those contents are worth having to a particular reader. The shape of the charge is also, very often, the only evidence handed over before anything is signed. Read it as evidence rather than as a price tag.

What does each charge do as the order changes size?

Before a single number appears, one declaration, and it is not a formality. No arrangement anywhere charges the amounts below. The two shapes below are control settings, sized so that the point where they meet lands on a round number that can be rebuilt in the head. A control setting belongs to nobody, and the amounts one produces describe nobody.

Control setting one, a share of order value, struck at 0.10 per cent of order value. Control setting two, a flat amount for the order, struck at Rs 20.00/-. Now read them across three order sizes.

The multiplications, one at a time. 0.10 per cent of Rs 1,000/- is Rs 1.00/-. 0.10 per cent of Rs 1,00,000/- is Rs 100.00/-. 0.10 per cent of Rs 10,00,000/- is Rs 1,000/-. The flat amount is Rs 20.00/- on every line of that table. Flat means one amount whatever the order value, and it means nothing else.

Now the crossing. A rate of 0.10 per cent is one thousandth of the order value, so the two shapes must agree at an order value one thousand times the flat amount: one thousand multiplied by Rs 20.00/- gives Rs 20,000/-. Checked back the other way, 0.10 per cent of Rs 20,000/- is Rs 20.00/-. The flat amount matches to the rupee. Below an order value of Rs 20,000/- the flat amount is the larger of the two, and above it the share of order value is.

Where a particular reader's own orders sit against that crossing is arithmetic, and arithmetic is all it is. The division above settles which of the two charges is larger at a given order value. How often somebody places orders, at what sizes and why, is a separate set of facts about that person.

The chart above stops at an order value of Rs 50,000/- so that the crossing is large enough to see. The three worked orders run much wider than that, and drawing all of them on one scale would squeeze the whole of the interesting part into the first few millimetres. A reader comparing bar lengths across panels that were never on the same scale would draw a conclusion the drawing did not make. So the figure below gives each order size its own panel and its own scale, and says so on its face.

The reversal is the finding. Read the two ends of that range together. On an order of Rs 1,000/- the flat amount is twenty times the share of order value. On an order of Rs 10,00,000/- the share of order value is fifty times the flat amount. Nothing about either rule changed between those two lines. Only the order value moved, and the answer to which charge is larger turned over completely.

Who answers when something goes wrong?

Who answers is the row readers think about least and mind about most, and it only becomes interesting on the day a payment does not land, a security does not appear, or a charge shows up that nobody can explain.

In one arrangement there is a named person whose job includes answering. In the other there is a process: a form, a ticket, a queue, and a record that the complaint exists. Both of those are real, and each of them attracts a belief that will not survive five minutes of thought.

A named person is not the same as a faster answer, and a process is not the same as no answer. Both halves need saying. Most readers believe exactly one of them and not the other. A named person can be on leave, can be three weeks into the job, can be the wrong person for a settlement question. A process can be quicker than a person for precisely the reason it feels colder: it does not wait for one human being to be free.

Long before the need arises, the thing to know is the grievance routeThe path a complaint travels and the parties it passes through: who receives it, who it goes to if the first answer does not settle it, and the time allowed at each step.: who receives the complaint, who it goes to if the first answer does not settle it, and how long each step is allowed to take. The route is set by SEBI at sebi.gov.in.

What does neither arrangement change?

Three things, and this part is what keeps the comparison a comparison instead of a ranking. One order put through the first arrangement, and the same order put through the second, comes out identical on all three both times.

First, the price the order is filled at. The fill price is settled where the orders meet, by what somebody on the other side was willing to do at that instant. No arrangement on the client's side of the middle has a vote in it, and an arrangement that suggested otherwise would be claiming something no party in the middle can deliver.

Second, what the venue charges. Kaveri Stock Exchange Limited, invented, takes a transaction feeThe rate a venue charges on what changes hands on it. A different base from a charge struck on one order's value, and covered separately. of 0.00325 per cent of turnoverThe value of what changes hands on a venue over a stated period. Turnover is the base the venue's own rate is struck on, and it is not the same base as one order's value. for the stated year. Read on one order of Rs 1,00,000/- that rate gives Rs 3.25/-, and read on one order of Rs 10,00,000/- it gives Rs 32.50/-. Reading a rate struck on a year of turnover down onto a single order is a comparison device. The point survives either way. The rate is struck on what changed hands and not on who brought it, and the figure is the same whichever arrangement carried the order there.

Third, the party each side ends up facing. Once the orders are matched, the clearing corporation of Kaveri Stock Exchange Limited, a separate company from the exchange and never the same one, steps into the middle and becomes the party the buying client owes and the party the selling client is owed by. Which arrangement carried the order has nothing whatever to do with it, and the settlementThe completion of a matched trade, when money moves one way and securities move the other. Its timing is set by the authority named later and is not stated here. that follows is between the clearing corporation and each side.

The parts of the trade that decide whether it happens at all are identical in both arrangements, and everything that differs is what somebody bundled around them.

How does somebody choosing an arrangement work through the two documents?

Who sets the conditions on charging, on advising and on complaints?

Four of the conditions this comparison walks into are not the arrangement's to set. An authority sets them and revises them, so a value copied out of one freezes on the day it is copied while the requirement behind it carries on moving. The rows below are drawn with the value column empty and the authority printed where a value would otherwise sit. A sheet like this is genuinely useful while blank. What it teaches is which condition exists and where the answer lives.