Should you stick with your current stock broker or switch to a discounter? To answer that question, you need to consider your own experience and abilities, and those of your stock broker.

Brokers, good and bad

A good stock broker (one who is experienced, knowledgeable, and oriented toward the long term) is worth the top commissions you are likely to pay. For instance, suppose your average commission is 2% and you replace one-third of your portfolio every year (both figures are on the high side). In this case, you’d pay 1.34% of your portfolio’s value each year in commissions. That’s less than the 2% to 3% management fee on a typical mutual fund.

A poor stock broker (one who tries to steer you into heavy trading, risky or inappropriate investments, or who pretends to know more than they actually do) can cost you far more, because you’ll have losses on top of commissions. But before you switch to a discounter, remember that doing so gives you unlimited opportunity to go wrong on your own. The clerk who takes your order won’t warn you if they see you’re about to do something you’ll regret, even if they know this to be the case.

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Before switching, put yourself through a brutal self-assessment. Are you able to single out a selection of investments that’s right for you, keeping investment quality and diversification in mind? If not, you may be better off finding a new full-service stock broker or advisor.

Many investors focus on discounters’ ads, some of which claim savings of “up to 83%.” But such ads compare the advertiser’s deepest discounts with the posted rates at a major stock broker; the real savings may be much lower. Many brokers offer discounts on all but the smallest orders to anybody who asks (or insists). The larger the order, the smaller the difference between the commissions of a conventional stock broker and those of a discounter.

Low commission rates sometimes lead investors to trade more than they normally would, assuming they can’t lose because they can sell at the first sign of trouble. Being quick to sell can cut your losses, but that’s not the same as making money. And, if you are holding an investment that has a huge move ahead of it, you may wind up selling just before the move begins.

In the long run, the best way to cut commissions is by sticking to high-quality investments and making fewer transactions. This also improves your tax deferral.

For instance, suppose you buy an investment at $10 and it goes to $20. As long as you hold on, the entire $20 keeps on producing dividends and capital gains for you. If you sell, you’ll have only $16 or so to reinvest after capital-gains taxes and commissions.