Every Wednesday, we publish our “Investor Toolkit” series on TSI Network. Whether you’re a new or experienced investor, these weekly updates are designed to give you specific investment advice on the fundamentals of successful investing. Each Investor Toolkit update gives you a new piece of investment advice and shows you how you can put it into practice right away.

Today’s tip: “Make sure you understand the 3 ways you can put your money into investments.”

Before you start investing on your own in the stock market, you’ll have to decide whether to use a discount broker, a full-service stock broker, or a portfolio manager.

• Full-service investment advisor: This is the traditional stock broker (although brokers also sell bonds, mutual funds and other investments). Stock brokers are now more commonly referred to as “investment advisors.” But in fact, most brokers or investment advisors are commissioned sales people who make investment recommendations that you can accept or reject. There’s nothing inherently wrong with this arrangement, of course. But it introduces conflicts of interest that can influence your brokers’ recommendations, and can work against you.
  
  For instance, your broker’s income is proportional to the frequency of your trading, but increased trading is likely to cost you money. Commission rates vary among investments, which gives brokers an incentive to sell the investments that pay the highest commissions. But a general rule is that the riskier an investment, the more commission a broker earns for selling it.
  
  In addition, brokers have no “fiduciary relationship” with their clients. They don’t need to do what’s best for the client. They are just supposed to try to make sure that the securities they sell are “suitable” for their clients. However, “suitable” covers a wide range of desirable and undesirable securities.
  
  A good stock broker is one who understands investing and who has the integrity to settle conflicts of interest in the client’s favour. Good stock brokers can provide an effective and economical way to manage your investments. Unfortunately, they are hard to find.

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• Discount stock broker: Unlike full-service stock brokers, discount brokers simply carry out buy and sell orders for their clients, and charge lower commission rates than full-service brokers. You pay even lower commissions if you trade stocks online, instead of placing orders over the phone.
  
  The main drawback of using a discount broker is that it gives you unlimited opportunity to make costly mistakes on your own. The clerk who takes your order won’t recognize, much less warn you, if they see you’re about to do something you’ll regret. In contrast, good full-service brokers will try to talk you out of bad ideas.
  
  Discount brokers are your best choice if you make your own investment decisions. Why pay extra for full service you don’t need or use? But if you use a discounter, you may want to secure outside sources of investment advice (such as our newsletters), if only to serve as a second opinion on your decisions.
• Portfolio Manager: Portfolio managers take a more active role than brokers. Instead of simply presenting you with investment advice that you can accept or reject, they generally make and carry out investment decisions for you, for a fee. Consequently, portfolio managers are more stringently regulated than full-service or discount brokers. In particular, portfolio managers must maintain a fiduciary relationship with their clients. Rather than simply choosing suitable investments, they must always try to do what’s best for the client.
  
  The best portfolio managers take pains to eliminate conflicts of interest between themselves and their clients. However, some portfolio managers rely on brokers to find clients. This can reintroduce conflicts of interest that you hoped to avoid by dealing with a portfolio manager instead of a broker.
  
  If you want to hire a portfolio manager, our advice is to choose one who is not broker-owned or broker-affiliated in any way. Our Successful Investor Wealth Management service is one example.

Next Wednesday, June 2, 2010, Investor Toolkit will give you our investment advice on what to look for in a full-service broker.

If you’re looking for clear, unbiased investment advice, you should become a member of Pat McKeough’s Inner Circle. When you do, you get to ask me and my team of analysts your own specific investment questions, plus you get all four of my investment advisories and much more. Click here to learn how you can start profiting from Pat McKeough’s Inner Circle right away.