What You’ll get from This Guide
By the time you finish reading this guide, you’ll know the best type of brokerage firm to use and which specific broker to open your account with. In short, you’ll be prepared to open and fund your brokerage account knowing you made the best decision possible.
Where to open an account is an important topic. In fact, opening the right account with the right company is crucial if you want to have the right tools to have a successful investing career and if you want to reduce the associated costs. You’ll see how important these are in a few minutes.
This guide is a road map to help you make this all important choice. We’ll focus on selecting the best investment brokerage for you. We’ll help you to match your own personal investment preferences and temperament with the firms that provide the most comprehensive services and value to meet your investment unique needs.
In this guide we will cover the following:
- The six types of investment brokerages available. How they work and how they charge you.
- How your own investment style, financial plan and risk tolerance impact your decision on where to open your account.
- Matching investment brokerage features with your needs and preferences (including a lengthy discussion of investment brokerage fees)
- A checklist to help you pinpoint the right investment broker.
- Easy-to-use tables that compares the pros and cons of the best discount brokers and the best robo advisors so you can save time and connect with the firms that offer the benefits most important to you.
Types of Investment Brokerages Available
There are 6 primary types of investment brokerages or firms available: discount brokers, full-service brokers, mutual fund families, robo advisors, financial advisors and money managers. Although you can use a bank as a broker, I strongly recommend never to do so.
Why You Should NEVER Buy Investments From Your Bank
Banks are great places to store your short-term money but they are lousy places to get financial advice from or buy investments. That’s because they have a very strong incentive to sell you high-cost (which often means low-return) alternatives. Here’s why.
Most banks are publicly traded companies. That means they need to make higher profits every quarter in order to pump up their share price. And of course, pumping up the bank’s share value is their prime objective. As a result, the higher ups often put pressure on the sales people in the bank lobby to push annuities and heavily loaded mutual funds on unsuspecting bank customers.
We’ve spoken at length about why these investments are raw deals for you. But the banks do it anyway because they want to maximize their income – not your return.
In other words, the bank is interested in short-term results while selling you long-term investment solutions. Whenever a financial salesperson does that, it always spells trouble for clients.
Banks are not the place to go for investments but they are good for short-term holdings. If you are looking for a bank that offers very competitive rates on deposits check out our banking guide.
When I started my career I sold investments in a bank. My manager relentlessly “encouraged me” to sell these products as a means of increasing fee income for the bank. Ultimately, that’s why I left and became independent.
This doesn’t mean that every independent advisor is a saint. And it doesn’t mean that every bank financial advisor is a grease ball either. I’m sure there are many who are honest and caring. But when you walk into the bank lobby please be on guard.
When To Rely On Banks For Advice
I’m sure that most people who work in banks are nice people. The sad thing is their managers turn them into hungry sales vultures as quickly as possible. But you might be lucky and speak to someone who is actually interested in helping you before being turned to the dark side. How do you know?
1. Slow Down
The first thing to keep in mind is that if an investment is a good idea today – it will be a good idea tomorrow and next week too. In the overwhelming majority of cases, there is simply no reason to act quickly. Take your time. And if you feel like the person on the other side of the table is pressuring you, tell the sales shark you are not interested and leave. Simple as that. You don’t owe him or anyone else any explanations.
If you don’t fully understand the proposed investment, talk to a few people in your circle of trust who might have more experience. Get their take and make an informed decision. A reputable financial advisor is only too happy to have you speak to other informed people.
3. Ask The Downside Questions
Of all the tools at your disposal, this is probably the most important yet most often overlooked. Ask what happens if things go wrong. If everything goes well, everyone will be happy. But what if things turn south?
Can you easily exit the investment?
Under what conditions?
What are the penalties?
When do they expire?
Are the returns guaranteed? How?
How strong is the company standing behind the investment?
What is their track record?
Do you get paid a commission to sell me this? Can you provide other options that are comparable? What are the commissions on those competing alternatives?
You probably can (and should) think of a dozen more questions like these. Don’t be bashful. Take time to consider all the questions you need answers to. And once you complete your list, make sure you get all the answers you are looking for.
Bottom line? I’m biased because I’m an independent fee-based planner. None-the-less, I still think it’s a good idea to stay away from commission based financial planners and salespeople. And the banks are almost entirely comprised of commission-based salespeople.
Lets look at a few better solutions.
Discount brokers are just what the name implies – investment companies that enable you to invest through them with the lowest trading commissions and account fees available (though there is considerable variation in pricing even within the group).
The low trading fee structures they offer are particularly attractive to investors who want to trade actively. Trades are executed at a cost of just a few dollars (or pennies) per trade, typically regardless of the number of securities involved or the dollar amount of the transaction. This enables the active trader to execute a large number of trades with only minimal impact from commissions.
Discount brokers are typically large investment companies that offer a full range of investment offerings, including stocks, bonds, mutual funds, exchange traded funds (ETFs), government and corporate bonds, foreign securities, real estate investment trusts (REITs) and futures and options.
The primary fees involved with this type of investment brokerage are trading commissions. On the low end, you’re looking at less than $5 per transaction. On the high-end, you’re approaching $10. Remember of course, that you will have to pay a fee twice on each investment – once at the time of purchase, and again upon the sale. In that way, the lower cost broker is $10 per investment, while the higher priced broker is $20 per investment.
This always matters, but it matters more if you are a particularly active trader. For example, if you make 200 trades per year, you will incur $1,000 in commissions at the less expensive broker (200 trades X $5 per trade). But if you decide on the higher-priced broker, you will pay $2,000 in commissions during the year (200 trades X $10 per trade).
If you are working with a $100,000 investment portfolio, the higher cost broker will reduce your ROI by a full percentage (the extra $1,000 in fees divided by $100,000) over the course of a year.
TIP: The commission structures presented by discount brokers represent the fee for online trades. Trades executed by phone or by using broker assistance typically require higher fees, usually much higher. If you aren’t comfortable with the all-online arrangement, you will have to factor the higher fee structure into your considerations. See the chart below for more information.
Who Discount Brokers are Best Suited For
Discount brokers are best suited for investors who prefer to do their own investing, including security selection and portfolio allocation. Most discount brokers provide a wide array of trading, informational and educational services to help do-it-yourself investors to be more successful. Most also provide limited or full broker assistance, up to and including professional wealth management services. Though they primarily operate as online platforms, many of them also have a wide network of local branches.
The Downside Of Using Discount Brokers
If you are not sure about your investment or financial plan, a discount broker is not a good choice. These firms facilitate trading but they won’t help you avoid making inappropriate investments. And they won’t help make sure you are on the right path to reach your financial goals.
Even if you avail yourself of their financial advisors, these people are employees of the firm – they don’t work for you. They are typically young advisors with little or no experience and they won’t spend the time needed to really get to know you or draft a plan that is specifically crafted for your unique situation.
Discount Investment Brokerage Comparison
|MORE INFO||MORE INFO||MORE INFO||MORE INFO||MORE INFO|
|Commissions & Fees|
|Platforms & Tools|
|Especially Good For||Light to moderate traders who value deep research, high level platforms and convenience.||Experienced high volume stock traders.||Experienced options or stock traders.||High volume traders who rely on mobile devices.||Sophisticated investors who want deep research and filtering capability.|
|Pros||User-friendly platforms. Great research and educational tools and world-class customer service. Convenient branch locations and wide variety of banking services offered. Wide choice for commission-free ETFs and mutual funds.||Inexpensive. Great for active traders of stocks, options and forex. Strong trading platforms.||Inexpensive. Excellent research & platform. No inactivity fees. Customer-friendly support.||Great mobile apps and website. Low required minimum balance. Offers commission-free ETFs.||Sophisticated trading platform, mobile app and research.|
|Cons||High transaction fees and broker-assisted trading.||$50 inactivity fee, $50 closing fee, no commission-free ETFs, no commission-free mutual funds.||All mutual funds have $20 transaction fee. Very few commission-free ETFs. $60 IRA closing fee.||Sub-par research and trading tools compared to competitors.||$5k minimum balance requirement. Steep learning curve for trading platform. $35 IRA annual fee, $50 IRA account closing free, $125 outgoing account transfer fee. No commission-free ETFs or mutual funds.|
|Stock Trade Fees||$9.99||$4.95||$4.95||$4.95||$9.99|
|Option Base Fee||$9.99||$4.95||$4.95||$4.95||$0|
|Options Fee Per Contract||$0.75||$0,65||$0.5||$0.65||$1|
|Mutual Fund Trade Fee||$49.99||$9.95||$20||$9.95||$14.95|
|Broker Assisted Trade Fee||$44.99||$20||$25||$19.95||$20|
|Minimum Deposit To Open||$0||$0||$0||$0||$5000|
|Minimum Average Monthly Balance||$0||$0||$0||$0||$0|
|Commission Free ETFs||101||0||5||12||0|
|No-Load Mutual Funds||7573||5216||4650||4928||988|
|Total Funds Offered||12851||10138||12275||12191||4854|
|Android Tablet App||Yes||No||Yes||Yes||Yes|
|Apple Watch App||Yes||No||No||No||Yes|
|Retail Office Locations||105||0||0||2||0|
|Mutual Fund Trading||Yes||No||Yes||No||No|
|Simple Options Trading||Yes||Yes||Yes||Yes||Yes|
|Complex Options Trading||Yes||Yes||Yes||No||Yes|
|Education & Resources|
|Indicators & Reports||370||84||35||58||270|
|Watch List Fields||401||21||29||57||318|
This is a new class of investment services, having originated only about 10 years ago. These are online, fully automated investment platforms, and they typically don’t have local branches. They provide asset allocation services at a fraction of the cost of full-service brokers. Robo advisors are typically “hands-off” investment platforms. They do all of the investing for you, and don’t allow you to trade in individual securities or pick funds or ETFs yourself.
That cost is usually in the form of a single annual management fee, which is a percentage (usually less than 1%) of the value of your portfolio. There are no trading commissions but if the robo advisor uses mutual funds or ETFs, there will be those additional management fees to consider. The good news is robo advisors usually have very small required initial deposits, if they even require a deposit to open an account at all. See the chart below.
A typical robo advisor will start by asking you a series of questions that are designed to determine your risk tolerance and investment goals. Once they have this information, they will construct a portfolio that is consistent with that tolerance and your investment goals.
Portfolios are often constructed using Modern Portfolio Theory (MPT), which emphasizes general asset classes over individual security selection. For this reason, portfolios are typically built on a mix of a relatively small number (6-12) of ETFs. Robo advisors are able to achieve maximum market exposure using this relatively small selection of ETF’s.
Once the portfolio has been established, it will be fully managed by the platform. This includes periodic rebalancing of your portfolio to keep it consistent with the original portfolio allocation. Some robo advisors also provide tax loss harvesting, or TLH, that will enable your portfolio to minimize short-term capital gains.
As I mentioned above, robo advisors charge an annual fee that is based on a percentage of your portfolio size. It can range between zero (yes, as in no fee) and something less than 1%.
But those costs may be just the tip of the iceberg. It’s also absolutely necessary to look at any secondary expenses connected with your account. Since robo advisors are a new investment concept, and in a state of rapid evolution, you need to pay careful attention to the “fine print”, as this may contain clues as to various fees and contingency expenses. These can include ETF expense fees or even flat annual fees, which may or may not be included in the management fee.
TIP: Many robo advisor fee structures work on a sliding scale. For example, while a platform may advertise an annual fee of 0.15%, it may require a portfolio size of $50,000 or $100,000 or more to get that rate. A portfolio of $2,000 may be subject to a much higher annual fee on a percentage basis.
Who Robo Advisors are Best Suited For
Robo advisors might be well-suited to new investors, who have very little money to invest, and are not familiar with how to properly do it. Their low fees and small minimum initial deposit requirements work well for investors who are starting out with only a few dollars.
The Downsides Of Using Robo Advisors
It’s true that Robo advisors ask some questions to try to qualify which portfolio makes most sense for you. But those are very rudimentary and don’t take your entire picture into account. Also, the investment approach is based on modern portfolio theory which has it’s problems. Namely, during significant market downturns, such an approach may not deliver the results you expect.
Depending on the robo advisor in question and the extent to which they try to understand your unique situation, the resulting investment approach may turn out to be very similar to that offered by a balanced mutual fund. If that’s the case, you can save yourself the trouble and expense of using a robo advisor and just go that route instead.
The chart below lists the comparison between five of the most popular robo advisor platforms currently in the market:
|Robo Advisor||Betterment||Wealthfront||WiseBanyan||Charles Schwab||Personal Capital|
|More Info||More Info||More Info||More Info||More Info|
|# of Accounts||301921||100202||9437||202262||19522|
|Assets under management||$8 Billion||$5 Billion||$49 Million||$25 Billion||$3.9 Billion|
|Fees||0.25%/yr||None first $10k, 0.25%/yr for more||None||None||0.49% – 0.89%/yr depending upon AUM|
|Tax Loss Harvesting||Yes||Yes||Yes||$50k+||Yes|
|Advice||Automated + Human Assisted||Automated||Automated||Automated||Human Assisted|
|Products (see pocketrisk)||ETFs||ETFs||ETFs||ETFs||Individual Stocks and ETFs|
|Single Stock Diversification||No||Yes*||No||No||No|
|Retirement Planning Tools||Yes||Yes||Yes||Yes||Yes|
|IRA / Roth IRA||Yes||Yes||Yes||Yes||Yes|
|Financial Planning, Retirement, IRA's, Trusts, Tax Loss Harvesting +, Tax-Coordinated Portfolio||Retirement, Wealth Building, Education, Finanial Planning, Selling Plan, College Savings, Tax-Loss Harvesting, Direct Indexing||Individual + Retirement||Joint tenant w/Rights of Survivorship, Tenants in Common,Community Property, Custodial||401(k) Asset Allocaion, Insurance Coverage, 529 Plan, Retirement Planning, Estate Planning, Cash Flow and Dept Management, Savings Plan, Legacy Planning and Charitable Giving, Home And Purchases Refinancing, Stock Options and deffered compensation|
Full Service Brokers
Full-service brokers are costly but still offer value to some investors. They are pricey because they have much higher overhead costs and provide investment services tailored to the needs of each investor. Rather than you calling the shots as is the case when you use a discount broker, the full service option is structured for those who want advice and direction.
When you work with a full-service broker, you are assigned an individual financial advisor. That person handles all of your investment and financial needs at every step of the process. Though the firm will provide a wide variety of service departments, your financial advisor acts as the point person, directing the entire process.
Many of the services offered by full service brokers are highly specialized. For example, they may provide services for high wealth clients, that include access to initial public offerings and various limited partnerships as well as estate planning in some cases. They typically also offer insurance services as well as loans.
These brokers sometimes charge commissions for each trade you make. These commissions are typically far higher than those charged by discount brokers. Other times full service brokers charge a fee based on a percentage of your portfolio. This is typically in the range of 1% or higher, but there could also be trading commissions based on the number of trades in your portfolio.
Who Full-service Brokers are Best Suited For
Full-service brokers might be used by high net worth individuals, who have little time, interest, or inclination to manage their own investments and financial affairs. Stock brokers can be very valuable if you find one who is expert in finding profitable individual stocks that align with your goals and priorities.
Examples of full service investment brokers in include UBS, Merrill Lynch, Edward Jones, Raymond James, Ameriprise Financial, Wells Fargo Advisors and AXA Advisors. However, many discount brokerage firms, such as Charles Schwab and Fidelity Investments, do offer full-service brokerage to their clients at higher fees.
The Downsides Of Full Service Stock Brokers
Full service brokers are expensive and often simply product pushers. They are employees of their firm and they have no fiduciary responsibility towards you or any other client. They often push money management packages and or mutual funds put together by their firm for the firm’s benefit. Your advisor may not have any financial skills and may not be able to provide a useful financial plan.
Remember, full service brokers have tremendous overhead because of their vast hierarchy and the high rent these firms usually have to pay for class A office buildings. Guess who pays for all those managers, vice-Presidents and fancy real estate? You and their other clients.
Mutual Fund Families
Mutual fund families are investment companies that create and manage their own proprietary funds. This can include both mutual funds and ETF’s. These investment companies vary in size, from smaller families that offer a handful of funds, to larger families that offer hundreds of individual funds. Some of the larger mutual fund companies also offer general investment brokerage services, in addition to providing funds. Many of the larger mutual fund families manage billions of dollars. Vanguard, for example, has hundreds of funds and manages over $4 trillion dollars.
As I said, each fund family usually manages several different funds. That might include large-cap stock funds, mid-cap stock funds, small-cap stocks, industry sectors, bond funds (government and corporate), international market funds, emerging markets, commodities (like energy and precious metals), or any one of the many variations of any of these individual sectors. Let’s talk about the variety of costs associated with mutual funds and ETFs. You pay these fees no matter where you buy your funds but this is as good a place as any to make sure you understand how these fees work.
Some funds charge sales loads and they vary considerably between fund families and individuals funds.
Loads can typically range from 1% to as high as 5%. There are also variations as to the ways that loads are charged. For example, with some funds, there is only a front-end load paid at the time of purchase. With others, there may be a back-end load, paid on sale. Some funds will have both, such as a 1% upfront load, and a 1% backend load. And with many funds, the backend load may be waived if you hold the fund for a number of years.
There are many funds available that don’t have sales charges. These are called “no load” funds. You can purchase these funds through almost every kind of brokerage and advisor other than through a stock broker (unless they are acting as an investment advisor which is explained below.) Most investors should stay away from “loaded” funds as there are plenty of great alternatives that do not charge these ridiculous commissions and there is no evidence that load funds are any more successful than no-load funds.
Load or no-load, many brokers charge transaction fees when you buy or sell a fund. These usually run between $5 and $25. You can buy many funds without paying a transaction fee but that is not always to your benefit. Some of those are offered transaction free because the brokerage firm either charges higher management fees (explained below) or because the fund provider needs to add money to a newer fund and wants to use you as their Ginny pig.
TIP: Transaction fees are a minor issue for investors who trade infrequently but you still need to be aware of them.
Every mutual fund and ETF charges management fees. These are fees that are used to offset the costs of running the fund and earning a profit for the provider. These can be as low as .15% per year or as high as 3.5% per year. The fund or ETF provider charges 1/52 of this fee each week and simply deducts it from the value of the fund. No matter what, if you buy a fund or ETF you will pay management fees.
In addition, some funds charge 12b-1 fees. These fees are used to pay sales and marketing expenses for the fund. They can range between 0.25% and 1.00% of the value of the fund.
Many investors ignore these fees because they are charged as a reduction in the net asset value (NAV), rather than as a direct standalone charge to the investor. You don’t feel or see these fees but they still cost you money. You can find out how much your fund is charging you by reviewing the fund prospectus or looking it up online.
TIP: Portfolio turnover is also a cost factor with mutual funds and ETFs no matter where you buy them and no matter if they have a load or not. The more that a fund trades, the higher its operating fees are. Those fees also reduce your ROI, but are usually unnoticed. You can determine in advance what the portfolio turnover rate is of a fund that you are going to invest in. It is also listed in the fund prospectus, as well as an online description of the fund. Index funds tend to have the lowest portfolio turnover, and therefore the lowest operating expenses.
Who Mutual Fund Families are Best Suited For
While owning mutual funds are a great idea for many investors, holding your investments with a mutual fund family is rarely in your favor. It might work if you have very limited resources and are just starting out because it is very convenient and inexpensive.
The Downsides of Using A Mutual Fund As Your Broker
The major problem in having a fund family hold your money is that they only offer funds they own. Vanguard, for example, will not offer Fidelity funds. So if you use Vanguard only, you will have limited choices. One way to get around this is to open accounts with every fund family you want to invest with. But if you do that, you may end up with several accounts all over town which will be difficult to keep track of.
Also, keep in mind that even though you might avoid commissions by opening your account with a fund family, you will still pay the management expenses.
If you are investing small amounts, this could be fine. But if you have more than $10,000 and are interested in having more alternatives (which is usually a very good idea) this will not be the best choice.
Examples of mutual fund families include the Fidelity Investments, the Vanguard Group, T. Rowe Price, American Funds and Franklin Templeton Investments.
Money managers invest assets. Usually these people will only accept clients with more than $100,000 to invest and often you need to have more than $500,000 in order to hire them. They charge an annual fee to manage your money. They make all the decisions about your account and you may have no access to speak to this person. They do not provide investment or financial advice. They simply manage money as they sit fit. You can choose to hire them or not but they will not tailor their strategy to meet your requirements.
Who Money Managers Are Best Suited For
If you have significant assets and a well-defined financial plan the identifies your objectives and risk tolerance, the right money manager may be just the thing you need. Be sure to review their track record carefully on a year-by-year basis rather than on 3,5 and 10 year averages. The year-by-year analysis gives you a much better view as to the particular managers abilities during particularly good and bad years. Both are important to you.
The Downsides Of Money Managers
There are several challenges with hiring a money manager. First, even if you have a great manager, what you might really need is a financial advisor. The advisor (explained below) will try to match your investments to your overall plan to help you achieve your goals with the least risk possible. A money manager doesn’t do that. Some people hire managers and forget about the overall strategy. That’s like being in a car moving at 100 mph but with nobody behind the steering wheel. Frightening.
The next issue is performance. No money manager, no matter how good they are, can do a great job every year. There may be long stretches of time where the manager under-performs. When that happens, you might be tempted to jump ship at the worst possible time. What you ought to do is look at risk-adjusted return over long periods of time but few investors are able to do that. The result is that many investors hop around from money manager to money manager looking for the silver bullet that doesn’t exist and losing precious time and money along the way.
On the other side of the coin, it’s true that money managers live and die by performance. That often pushes them into taking undue risk with your money. That’s an additional problem with money managers of course.
The last problem is that money managers are often sold to you by brokers of large investment firms. The main concern of that broker may be to get into a program that charges annual fees rather than find the best solution for your situation. Those money managers may have a bad track record but you may not discover that unless you ask to see the numbers.
Financial Planners wear many hats. They usually are able to run financial plans for you, map out your financial future and pinpoint what you can do today to improve your situation today and for your future. In addition, they can usually comment on your estate planning and insurance needs. Of course they usually manage money for clients and that is how they really make their money. They charge management fees to manage portfolios and some charge additional fees to run your financial plan. Others prepare your plan as a service if you are a money management client.
Who Financial Planners Are Best Suited For
If your net worth exceeds $500,000, the right financial planner (or advisor) could be a game-changer for you. A good planner will run a financial plan for you which identifies what you need to do in order to have a better chance at achieving your goals. That includes providing direction on all things financial in your life – including money management. And if you do your due diligence, you can find an advisor who is a fiduciary with no other obligation than to put your interests above everything else.
TIP: Not all financial advisors are fiduciaries and it’s important that you take time to understand what this means and why it’s so important.
The Downsides of Working With Financial Advisors
Anyone can call themselves an advisor so, as mentioned above, you have to do your homework. Even if you do identify a fiduciary to work with, that doesn’t mean they have the skills and/or experience to do a good job.
Remember, that financial advisors are often a “Jack of all Trades” and sometimes that means a master of none. Be sure you know what your over-riding financial concerns are and find a qualified advisor who can address those needs.
General Caveat On Advisor, Broker and Investment Fees
No matter who you work with or what you buy, you are going to pay for it. And fees are important. But you have to consider fees in relation to how you invest. Let me explain this.
If you are a “buy and hold” investor, transaction fees (as long as they are reasonable) aren’t a big problem because you won’t trade that often. The fees that are important to long-term investors however are ongoing fees such as mutual fund and management costs (explained above).
If you pick your own stocks, you will have no management or mutual fund costs to worry about but transaction costs are very important – more so if you plan to trade frequently.
The Big Fee That Nobody Thinks About
The greatest “fee” that investors must think about is the failure to reach their most important financial goals. This is true if you buy your own funds, use an advisor or pick stocks. And many people do fail because they have no plan and are marching in the wrong direction. For example, they may buy low cost funds, but what good is that if they are never able to retire?
This can also happen because of under-performance. As explained earlier, many investors lag the market because they hold losing investments too long or because they fail to invest in a disciplined manner. For example, if you average 5% on your investments while the market returned 8% on average, the “fee” is 3% each year. That is much higher than most management or fund fees.
On $100,000 invested over 20 years, that “fee” comes to $60,000 – using simple interest alone. If you figure a 4% interest rate, the total cost of that “fee” comes to $89,000. That’s why it’s so important to audit yourself from time to time. We’ve covered that in a different guide and it might make sense for you to review that now.
Bottom line? If all things were equal, fund fees and transaction costs would be the most important things to consider. But all things are never equal. You have to consider the best investment strategy for your mentality and goals. Focus first on crafting a plan to help you do that and only then seek out the least cost, least risk way to execute your plan. It’s much better to pay a bit more money yet achieve your goals than to save a little on fund fees and investment costs but fail to reach your goals.
This is not to say that everyone who creates a plan will achieve their goals or that higher cost funds and advisors are always better choices. I just want you to consider your goals and needs first. And if you need to spend a little dough to get good advice, it may make sense to do so.
How Your Investment Plan Influences Which Broker You Select
If it’s important to choose the right investment brokerage. Also it’s important to have clarity when it comes to your overall investment plan. Your investment plan answers three all-important questions;
- What will you buy?
- When will you buy it?
- When will you sell it?
If you can’t answer these questions, your best next step may be to study up on the topic or speak with a financial planner or advisor, stock broker or robo advisor. The right person should be able to help you match the right investment plan to your needs and resources. Keep digging until you find a strategy that feels right to you.
Even if you think you know the answers to these questions, take a moment and check yourself. Investing isn’t just about making tons of money. Investing is about achieving your long-term goals while taking the minimum risk possible. Sure you want to pick profitable investments. But that needs to be guided by an overriding investment plan that considers risk too. You can think of it as a business plan for your investments.
In addition to the 3 questions above, your investment plan should address the “why” of your investing activities. That is, why are you investing at all and how much risk are you willing to take? The answer to those questions will determine how you invest, and what you invest in.
For example, if the goal is retirement and you have a moderate risk tolerance, you probably have a very long investment horizon. You will therefore want at least some of your assets invested to provide the potential for significant capital gains over a period of decades.
If you are investing for your children’s education, your time horizon could be significantly shorter, perhaps only 10 or 15 years. That will require an investment portfolio that is generally lower risk, perhaps based primarily on assets that provide a mix of capital appreciation and regular income from interest and dividends.
Before even considering an investment broker, you should first develop your investment plan. This will answer the questions spelled out above and be consistent with your overall investment goals. That will give you an idea as to the type of investing you need to do. Speculation? Long-term growth? Something in between?
Matching investment brokerage features with your resources, needs and preferences
Now that you know how different brokerages work and you are clear on your investment plan, it’s time to drill down to find the right brokerage firm to work with. Let’s start that discussion by talking about your financial resources.
For Those With Limited Resources
Full-service brokers, money managers and financial advisors typically cater to large investors. They may even have high investment minimums, such as $50,000, $100,000, $250,000 or even $1 million or more. If you only have a few thousand dollars to invest, these professionals may not be an option. Don’t waste your time looking here.
But that doesn’t mean all is lost. If you are starting out with only a few thousand dollars, consider the discount brokers if you know what you want to invest in or robo advisors if you don’t. Use the comparison tables provided above to help narrow down your search.
For Those With Greater Resources
If you know how you want to invest, open an account with a discount broker but choose carefully. This is especially important if you are an active trader, whether that involves stocks, funds, options, or some other asset class. Some discount brokers are set up specifically for active traders, including low trading commissions. In fact, those commissions often work on a sliding scale. The more trading you do, the lower the commissions are. They also offer various tools to help you to trade more successfully. Get clear on the kind of trading, amounts and frequencies. Then, compare costs and open your account.
If you are not sure how to invest, it’s time to figure this out before going forward. How you decide to invest – your investment process – is by far the most important element that will influence your long-term results. Some long-term investors buy and hold. Others use an asset allocation strategy. And still others try to use a “market sensitive” approach (adjusting their holdings periodically in response to changes in the market).
Regardless of which camp you fall into, you are probably best served by using a discount broker assuming you want to call your own shots once you clarity here.
If you prefer to have someone else make the investment decisions for you, that person will determine where to open the account. Money managers and financial advisors typically use discount brokerage firms to house their clients’ accounts. So do robo advisors. Full-service brokers use their own firm as brokers in most cases.
Investment Experience Level
If you are a new investor, or not particularly confident in your investment abilities, it’s best to get professional help. This is where financial advisors, money managers and (maybe) full-service brokers might be useful if you have financial assets in excess of $100,000.
If you are an experienced investor, and satisfied with your investment performance, you will be better served with a discount broker. The low commissions that they charge will help to improve your return on investment.
The Time Factor
Even if you are an experienced investor, you may simply lack the time needed to put into your investment activities. Many people are more concerned with their careers and personal lives, and while they are interested in investing, they simply don’t have the time and energy to devote to it. As a result, they neglect their portfolios and it ends up costing them a fortune.
If that describes your situation, you will be more interested in professional management. Again, a financial advisor, money manager or perhaps a full service broker might be good people to interview. The right person can handle the investment side of your life and that will free you up to concentrate on everything else.
Pinpointing Where To Open Your Discount Brokerage Account
If, after reading the material above, you decide to open your own discount brokerage account, it’s time to get busy selecting the right one.
That decision should be arrived at after considering the optimum combination of the various broker features that will provide the best service level for you.
Those features include:
Broker Assistance Level
Discount brokers actually offer a considerable amount of broker assistance. However, they may charge for certain services, such as investment recommendations or strategies. As noted earlier, you can fully expect to pay higher commissions if you make broker assisted trades.
You’ll have to carefully evaluate the different discount brokers, and favor those who are unlikely to charge you for the broker assistance features that you most need.
Nearly all discount brokerages offer generous levels of customer service. It’s a feature that is simply expected in this day and time. But there are variables in both the quantity and quality of that service.
For example, while some brokerage firms offer 24/7 customer contact, others may restrict it to extended trading days only, such as 6:00 AM to 8:00 PM on weekdays, and limited hours on Saturdays.
The quality of customer service can also be dramatically different from one firm to another. Refer back to our comparison chart to get a sense of how committed each discount broker is to customer service.
You might also find yourself making a trade-off between customer service and fee structures. If so, determine which is more important to you. Having said that, some discount brokers offer both low fees and high quality customer service. Again, refer to our chart for more information.
Discount brokers offer a wealth of tools that can help you to become a more successful trader, as well as to trade more efficiently. While there are a lot of similarities between trading tools with the various brokers, some do have unique tools, or simply a wider variety of them.
It may be a matter of leaning toward a broker that has the specific trading tools that will be most beneficial for you. Fortunately, many brokers offer virtual trading platforms, where you can take the service for a test run to see if it is right for you. That is, use the service without actually investing with real money. That will give you a chance to know if a broker’s trading platform is the right fit for you.
If you already have access to various investor education features from outside sources, this may not be important to you. But many brokerage firms do offer articles and videos that can help you to increase your investment knowledge. In fact, some firms have entire library pages filled with education topics, as well as tutorials on how to get best use out of the platform.
If you are a new or intermediate level investor, this may be an important resource for you. But even if you are a seasoned investor, there’s always something new coming down the road. Having those resources available as part of the total broker package can be an efficient way of upgrading your investment game, while you are actually participating in the activity.
No matter which type of broker you choose, make sure that they offer the types of investments that you are most interested in, and in the largest possible quantity. Never assume that all brokers offer all investments! More specifically, there are brokers who specialize in certain investments that may or may not be of interest to you.
For example, some discount brokers specialize in options. They may offer other investments, but the orientation will always be in favor options. If you have no intention of trading options, such a broker may not be the right choice for you.
On the other hand, as a long-term investor, you have to consider that you’ll learn and grow and expand your investment horizons over time. For that reason, even if you currently prefer to invest in mutual funds or ETF’s, you may want to still work with a broker who also offers all other investment options. This will enable you to transition into those other investments without having to change brokers.
Minimum Initial Deposit/Account Minimum Balance Requirements
The minimum initial deposit requirement is greatly low with discount brokers. Just make sure to find out what that number is before you open an account.
With the popularity of online investing, many discount investment brokerages exist exclusively as online platforms. If you prefer a brokerage that has a local branch in your area, you will want to favor the firms that have them available.
Some of the larger discount brokers have local branches, often throughout the country. If you like having face-to-face contact with your broker, this may be an additional consideration.
One More Point: Don’t be Swayed by Attractive Promotion Offers!
It’s very common for discount investment brokerages to make promotion offers. They may offer a cash bonus to open your account, reimbursements of transfer fees from other brokers, for a certain number of free trades.
These offers can be attractive, but you always have to weigh out the long-term benefits. For example, if you have one broker that offers a $600 sign-up bonus, and another that offers only $100, you may be tempted to go with the broker that has the higher bonus. But if that same broker charges $10 per trade, while the small bonus broker charges only $5 per trade, the benefit of the higher bonus can disappear quickly.
For example, if you make 100 trades in the first three months with a high bonus broker, you will give back the entire bonus advantage (100 trades X $5 more in trading fees per trade). After that, you will be losing money on every trade that you make from that point forward.
TIP: Getting a bonus to open an account with a broker is like found money. But you should never go the broker because of the bonus that they offer. Be aware that some broker bonuses are conditional, and may require an arrangement such as keeping a minimum balance in the account for a certain amount of time (often a full year), or executing a certain number of trades. A bonus is good to have, but only if the underlying service is worth having over the long-term.
Choosing the Right Investment Broker for You
Choosing the right investment broker is one of the most important investment decisions you can make. This is especially true if you are looking for an investment brokerage firm that will act as the trustee for your retirement plan. That will be a long-term investment, and will need to accommodate your investment style and preferences, and at the same time provide the services that you need to be successful.
Consider any investment brokerage firm against the criteria spelled out in this guide. Pay particular attention to the criteria that you consider to be most important for you, and in light of your long-term investment goals.
Also, please keep in mind that what might represent the best investment brokerage based on third-party evaluations or reviews, may not be the best firm for you. It has to be your best investment platform in order for it to work for you.
Go through each of the following steps in the order presented. This can help you achieve your financial goals with the least possible cost and risk in the shortest amount of time and help you identify exactly which brokerage to work with:
- Make sure you have a well-defined financial plan. This will help you determine your investment style. Also, take an objective risk tolerance test to insure your financial goals and comfort level are balanced.
- Make sure you have a clearly defined investment plan; it should include specific investment goals and answer the three questions; what are you going to buy, when are you going to buy it and when will you sell?
- If you know how you want to invest, you are happy with your results and you want to continue making the decisions, open an account with a discount broker using the comparison table above to make the best choice.
- If you don’t want to make the investment decisions and you have modest assets, consider using a robo advisor. Use the robo advisor comparison table to pick the one that fits your needs best.
- If your financial assets exceed $100,000 and you do not want to make your own investment choices, interview financial advisors and (possibly) stock brokers.
Once you settle on an investment brokerage, continue working with them for as long as they meet your investment needs. As you grow and improve as an investor you may eventually decide that it’s time to look into yet another brokerage. And when you do, feel free to review this guide once more!
How To Avoid The Biggest Mistake Ever
Some people study and learn but never take action. This is a shame because they never put their knowledge to work. Let me share with you something that I’ve learned over my 25+ years as a financial professional. You learn more by doing than by studying. You have to study of course. And you’ve done that.
You’ve gotten to the bottom of this mammoth guide. You are more schooled in investments than most people you know. You’ve invested a lot of time. Make that time count now by opening your account. Even if you don’t pick the very best broker, just getting your account open – even with just $100 – will help you learn more than you learned by reading this comprehensive guide.
I forget who said this, but the following quote changed my life. Maybe it will help you too:
The best thing you can do is the right thing. The second best thing you can do is the wrong thing. The worst thing you can do is nothing.
You have all the knowledge you need. I’ve been working in this field for decades and I’ve distilled all I’ve learned on this topic in this 7000 word post. You can’t predict the future – it’s unknowable. The only thing stopping you now is fear. I understand that. We all fear the unknown. But as long as you follow the concepts presented in this post, you can’t make a huge mistake. Start off small. But start. Don’t let this be a waste of your time. Use the comparison sheets if you are looking for a discount broker or robo advisor. Pick up the phone or go online and just open your account.
I have faith in you and I look forward to hearing about your experiences and success.