A BROKERAGE FIRM IS ONE of the first places investors consider for buying and selling stocks, bonds, mutual or exchange-traded funds and other investments.
Just like ice cream, brokerage firms can vary greatly in quality, options and price, from the plain vanilla variety – such as a discount brokerage for do-it-yourself investors – to a complicated sundae with an assortment of toppings – such as a full-service brokerage with a broker to advise you.
Brokers are individuals or firms who charge a fee or commission for executing trades on behalf of their investors. An investor typically opens an account with a brokerage and receives assistance from a broker who works there.
Discount or online brokerages for do-it-yourself investors include Charles Schwab Corp. (ticker: SCHW), Fidelity Investments, TD Ameritrade (AMTD) or E-Trade Financial Corp. (ETFC). Examples of full-service brokers include Raymond James Financial (RJF) or Edward Jones, to name a couple.
Some online platforms, such as E-Trade, allow investors to place online trades directly with a brokerage for a fraction of the traditional cost or nothing, depending on the asset being traded. In the case of Robinhood, the Palo Alto, California-based firm known for commission-free online trading, investors can sign up for its app and trade for free without a minimum deposit.
Opening a brokerage account is the first big step to jump-starting your investing journey. Whether you are a hands-on investor or one who prefers your assets to be managed for you, consider these steps in your investment approach:
Choosing a brokerage.
Setting up an account.
Fees, commissions and account minimums.
Choosing a Brokerage
Instead of just getting started, you need to know your investment objectives first, says Kevin Boyles, vice president at Millennium Trust Co. in Oak Brook, Illinois.
"Understand the purpose of your money. What's the time frame you intend the money for? This will dictate the type of account you use, whether it's a Roth (individual retirement account), health savings account or a nonspecific brokerage account, and will change how you look at the brokerage fee structure," Boyles says.
Decide whether you want to be more hands-on as a DIY investor or if you prefer to take a passive approach or use a full-service brokerage to manage your investment account for you.
A full-service broker may be suited for an investor who is not in tune with trading strategies to grow their wealth, is not familiar with what they should be investing in or has a large amount of wealth that requires financial professionals to advise what direction to take with their money.
When looking for options that suit your investment needs, evaluate a firm that has a breadth of services, from tech-based and human-assisted services, to a combination of the two, says Cynthia Loh, vice president of digital advice at Charles Schwab.
Investors who choose the DIY approach and prefer a cheap way to manage their assets may also prefer an online brokerage account or discount broker that enables the investor to buy and sell investment securities through the broker's website or app.
When searching for a broker, a few things to keep in mind are to make sure the trading platform is intuitive and easy to use, the broker fees are affordable and the broker offers research capabilities and educational resources that will assist in your investment decisions. Other important components include offering broad trading options and being well-regarded in the investing industry.
Another phenomenon on the rise is robo advisors, an automated investing service that acts as an online financial advisor in managing an investor's money based on a set of algorithms; some of those variables include the investor's time horizon, risk tolerance and financial goals, among other factors. This is a way to manage your money automatically with little to no human interaction.
Vanguard's robo advisor, called Vanguard Digital Advisor, has a variety of investment options, requires account minimums and has fees depending on your account holdings. Similarly, Fidelity's robo advisor, Fidelity Go, asks questions when you get started, from which it develops investing goals. Some of these low-cost money management tools may be suitable for a simplified approach to investing.
Investors should compare each brokerage's trading commissions, account maintenance and closure fees, investment options and accessibility.
"Decide on other details, like if you prefer access to a physical branch location or if online access will suffice," says Thomas Walsh, a portfolio manager with Palisades Hudson Financial Group in Atlanta. "Make sure that the brokerage firm offers access to the types of investments you would like to purchase, because not all do."
Setting Up An Account
After you decide which broker account is best for you, the next step is to set up your account. The process for opening a brokerage account is similar to setting up a bank account, with one important distinction, says Jeremy Hyndman, an investment fraud attorney at Investor Defense Law in Los Angeles.
For a new brokerage account, you'll be asked to fill out new account forms that will ask about your risk tolerance, investment objectives, time horizon and the extent of your financial knowledge in order to build an investor profile.
Most applications typically require you to also provide your contact information, Social Security or employer identification number, marital status, mother's maiden name, a financial statement listing information for assets or cash you may want to transfer and sometimes details from your driver's license.
Many firms will have you rank your investing preferences – for instance, preservation of capital, income, growth or speculation – depending on whether you are a conservative, moderate or aggressive investor.
"Any recommendations the brokerage firm makes should be suitable for the investor based on this profile," Hyndman says.
That's an important distinction, because a suitability standard isn't the same as a fiduciary standard. Registered investment advisors, also called RIAs, who may also be broker-dealers in some hybrid formats, must disclose any conflicts of interest and place their clients' best interests first, ahead of the advisor's own compensation.
Broker-dealers, on the other hand, are only required to offer investments suitable for their investors, according to the Financial Industry Regulatory Authority, or FINRA. To conduct securities transactions and business with the investing public in the U.S., firms and individuals must be registered with FINRA.
Broker-dealers can put their interests above their clients' and make recommendations based on commissions. In other words, broker-dealers hope to make money for themselves and their firm, and not you, the investor. Think of them as salespeople who are compensated per transaction whether you make or lose money.
After opening an account, you must fund it based on any minimum requirements and determine your investment strategy according to your age, risk tolerance and cash needs.
"Mutual funds and exchange-traded funds typically offer greater diversification than individual stocks," Walsh says. He also recommends rebalancing your portfolio periodically according to your target asset allocation by selling inflated assets and buying those that are cheap. "The most important thing is not to let day-to-day fluctuations in the stock market affect your long-term investment plan."
Fees, Commissions and Account Minimums
Most online large brokerage firms offer commission-free stocks, ETFs and other security trades. Before this pricing move, investors trading actively each day racked up the costs per trade. To have an extra edge among the competition, most online brokers offer top-of-the-line research to assist investors with trading decisions.
Most of the top online brokers like Fidelity, Vanguard, Charles Schwab and Robinhood do not charge an inactivity fee. Other brokers may demand a monthly, quarterly or annual fee or may require a minimum account amount to avoid a fee.
Many brokers offer incentives for new customers to open an account, such as cash bonuses, free stock or free trades. Starting in 2020, most online brokers do not charge maintenance fees.
Full-service brokerages or firms that provide a host of financial services to clients are typically commission-based, which means they are paid on transactions and sales of a trade. Also, they tend to charge some sort of fee to manage your investments, which might come as a flat fee or maybe even in the form of an hourly rate. Since this is a full-service investment option, fees tend to be higher.
If you are investing in a mutual fund, there are embedded management fees in the funds that are separate from brokerage fees, says Bryan Bibbo, a financial advisor at The JL Smith Group in Avon, Ohio. "There can also be trading costs within mutual funds that you need to be aware of. Some brokerage firms also charge annual fees and custodial fees on IRAs and Roth IRAs, so look out for those."
IRAs sometimes have custodial fees, a flat fee, attached, which may include the costs of managing the account, including any changes that need to be made. Custodial fees can be avoided in some cases if the investor meets a minimum investment threshold. For those brokers who require fees for commission and management, make sure those expenses are minimal.
"In the IRA world: shop and compare. Understand what it looks like if your profile changes and make sure you pick a provider that adapts with you as your situation adjusts. Larger institutions have more flexibility, but smaller firms can offer a more personalized service," Boyles says.
Robo advisors, prevalent among millennial users, charge an annual management fee but are regarded as a cheaper investment option. Robo advisors tend to charge a fee based on the percentage of the investor account value. So if an investor has $10,000 of assets under management with an annual fee of 0.25%, the cost would be $25 per year for the robo advisor to manage your account.
There are many brokerage options to consider as you embark on your investing journey. To make sure you are choosing the right brokerage for you, your ultimate choice should align with your financial needs and personal financial goals.