The Basics to Investing in CEFs: Selecting a Broker
Description
This article is from the Investing Articles: Closed-end Funds series.
The Basics to Investing in CEFs: Selecting a Broker
To buy and sell shares of a CEF, you need to place orders through an intermediary, called a broker, who will convey your instructions to the stock exchange specialists, and keep you informed of the status of your orders. In exchange, brokers charge a fee or commission, usually a percentage of the transaction (the number of shares or the total money involved, subject to a minimum fee).
Brokers come in three varieties: full-service, discount and deep discount. A full-service broker is supposed to provide research and information, and often investment advice specific to your needs. Correspondingly, the commissions charged by the broker are high. Investing in closed-end funds can be quite different from investing in stocks, accordingly, if you plan on this route, you should find a broker who specializes in closed-end funds. Given the recent surge in the number of closed-end funds, many large brokerage firms (e.g., Morgan Stanley, Lehman, Smith Barney) have brokers who primarily work with closed-end funds. In addition, some brokerage firms (e.g., Herzfeld Advisors) focus on closed-end funds.
The commissions involved in dealing with full-service brokers can be high, and, for the individual investor, may be a substantial portion of the amount to be invested. An alternative is a discount broker (e.g., Fidelity Investments or Schwab). The commission savings can be substantial (often 70% of the full-service commission), and the service is usually good. In addition, these discount brokers offer services such as automated access to your account, quotes, and investment orders via a PC or a touch-tone phone, often with a discount. Usually, for an additional fee, premium services and investment research or advice may be available.
At the extreme end are deep-discounters, who offer substantial savings over even the discount brokers, but usually offer a basic menu of services with no-frills attached. The customer service and response time varies between brokers. Some offer automated access to your account, quotes, and allow orders via a PC or a touch-tone phone.
To get some idea of the difference in commissions,
consider buying 5000 shares of a CEF at $15.
Deep-discounters will typically charge $18-$35 for the
transaction, discounters will typically charge $200-$250,
and full-service brokers may charge as much as $500+. A
comparison of many brokerages and their fees appears
periodically in the misc.invest newsgroup.
There are some other factors to consider: a) Many full-service brokers will give discounts to good clients---those with substantial assets to invest, or who invest frequently. b) Many full-service brokers will put in effort to get the best execution for their clients. If you place many market orders (see next section), the difference in execution may be significant. For example, if one broker can get you 5000 shares of a CEF at $15 while the other can get it only for $15.125, the difference is $625, and amply makes up for the difference in commissions.
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