If you’re serious about investing, you’ll need to have an account with a brokerage firm. Here we'll cover what a brokerage is and what types of brokerage firms there are. We also look at factors to consider when choosing a brokerage and how to open an account once you’ve made a decision.
A brokerage is a firm that enables trading of financial securities, such as stocks, mutual funds and bonds, between buyers and sellers. As an investor, having a brokerage account means you can buy and sell securities. Brokerages make money by charging buyers and sellers each time they execute a transaction, and by charging other administrative fees, such as account maintenance fees. There are a few different types of brokerages, including full service brokers, discount/online brokers and robo-advisors.
|Type||Description||Common Types of Fees|
|Full Service Broker||Portfolio management and other services with a financial advisor||
|Discount/Online Broker||Investor is responsible for selecting and buying investments||
|Robo-Advisor||Automated portfolio management, but no financial advisor||
What Is a Full Service Broker?
A full service broker provides comprehensive financial advice, planning and execution for its customers, including selecting investments and executing trades on these investments. Some full service brokers will also have retirement, estate or tax planning advice and services. They typically offer a wide variety of investments and provide their customers with in-house investment research and analysis. Because these brokers provide advice and execute transactions on behalf of their customers, they are usually the most expensive option, charging high commissions for each transaction, an advisory fee or account maintenance fees.
Since many full service brokers earn money on each product they sell you, this can create a conflict of interest leading some brokers to recommend investment products that are not suitable for the investor. Some full service brokers only charge advisory or flat fees, which removes this conflict of interest, and can lower a customer’s overall fees.
What Is a Discount/Online Broker?
Discount/online brokers are well suited for do-it-yourself investors. They do not provide investment advice, but they may provide some investment research and analysis free of charge. Investors using a discount/online broker will be responsible for choosing investments and executing trades themselves.
Because discount brokers do not offer all of the bells and whistles of a full service broker, they are much cheaper to use. They do not charge advisory fees, and their commissions on transactions are normally much lower than a full service broker. In addition, many do not charge account maintenance fees.
What Is a Robo-Advisor?
Robo-advisors occupy the middle ground between full service brokers and discount/online brokers. A robo-advisor is an online financial advisor that will build an automated portfolio of investments for its customers, but does not offer a human advisor. Like full service brokers, robo-advisors will select investments and execute trades on behalf of their customers. Since there is no human interaction, they cannot fully tailor a portfolio to each individual customer, handle specialized investment needs or provide advice on other issues, such as retirement or taxes. Many robo-advisors do not charge commission fees, instead charging an advisory fee, which is usually much lower than a full service broker.
It can be difficult to decide where to invest your money with so many brokerages in the market. Investors need to consider a myriad of factors from cost to trading style when evaluating a brokerage.
Do You Need a Discount Broker, Full Service Broker or Robo-Advisor?
When you are new to investing, it can be overwhelming to dive head-first into a discount brokerage and pick your investments yourself. If you find yourself wanting some advice on your investments, then it may make sense to consider a full service broker or a robo-advisor. Full service brokers can also be ideal for individuals who have complicated investment needs or a complex financial situation. Robo-advisors are a happy middle ground for the investor who does not want to pay the fees associated with a full service broker, but still wants a more hands-off approach to investing. If you prefer a do-it-yourself approach, then a discount/online broker is likely the best and cheapest solution.
What Are the Fees and Charges?
Before opening an account with a brokerage firm, you should read their schedule of fees and charges to understand how and when you will be charged. Fees and other costs can quickly erode your returns and could even eat into your principal funds. Some brokerages may come with hidden fees that are hard to discern -- in this case, it’s advisable to contact customer service to answer any questions you have about the fees. If you know how much you’ll be investing and how frequently you will be buying or selling, then it’s helpful to estimate your yearly fees across brokerages to make comparison easier.
What Are the Account Minimums?
Some brokerages require very high account minimums to open an account (especially full service brokers), whereas others have no account minimums. Some may also require their customers to maintain a minimum balance in the account to avoid additional fees. If you are new to investing or have little to invest, this may be a barrier to opening a brokerage account. Don’t despair though -- there are many brokers that have no opening or balance minimum requirements.
What Type of Account Do You Want to Open and What Do You Want to Invest in?
Most brokerages offer a variety of accounts, including retirement accounts, taxable accounts and custodial accounts. Depending on the type of account you want to open, there may be additional fees or charges associated. IRAs, for example, typically come with account closing or transfer fees that are higher than for a regular brokerage account.
Brokerages allow investors to invest in standard securities, such as stocks, bonds and funds, but not all brokerages allow investors to invest in more complex or riskier investments, such as penny stocks, foreign currencies or options. If you want to invest in these types of securities, then you should be looking for a brokerage that offers these investments at a reasonable cost.
How Often Will You Be Trading?
If plan on actively trading, executing multiple trades per week or day, then you will want to consider a brokerage that offers low commissions on transactions. For buy-and-hold investors (investors that trade infrequently), trading fees and commissions are less of a concern.
Does the Brokerage Offer Any Commission Free Products or Sign-Up Bonuses?
Two popular items that some brokerages offer are commission-free exchange traded funds (ETFs) and no-transaction-fee mutual funds. If you are planning to mainly invest in mutual funds or ETFs in your portfolio, then saving money on commissions and fees is important for protecting any returns on your investments. Some brokerages even run their own mutual funds and ETFs, which they allow their customers to invest in without transaction fees. Additionally, online brokerages regularly offer incentives to new account openers. This may include cash bonuses and free trades -- check out our guide on brokerage promotions and bonuses. These sign-up bonuses can help you minimize your overall transaction costs.
Does the Brokerage Provide Investment Research or Other Perks?
Investment research, such as analysis of specific investments or trends in the market, is an important resource for many investors, and the quality and price, if it’s not free, of this research varies greatly across brokerages. Some brokerages also offer other perks, such as online checking, debit card services or portfolio diversification advice. However, many of these incentives and perks offered have strict requirements that may include an initial deposit amount or restrictions on withdrawals. Before signing up for these perks, read the fine print to ensure you are eligible for the offer and that you understand what it entails.
What Is the Customer Experience?
Simply put, some brokerages have easier to use websites and better customer service than other brokerages. Some customers may not care if the website is harder to use or customer service is only available at certain hours as long as they can execute trades with minimal fees. For investors that may not be tech savvy, a good customer experience can make a big difference in the investing experience.
Even if you are tech savvy, it’s good to know that you can call, email or message a customer service representative in case you have any problems with your account. Many discount/online brokers only have an online presence. While this does help to reduce costs, it could also affect the level of overall customer service. Some brokers also charge hefty fees for broker assistance. If you think you may need broker assistance for your trades, consider opting for a broker with a brick-and-mortar presence.
Once you decide on a brokerage, you’ll want to open a new account with them. They'll need you to fill out information and make several decisions regarding your brokerage account. Some of the information that a brokerage will ask you for may include:
- Basic personal information, such as name, address, email address and date of birth
- Social Security Number or other tax identification number (required by federal agencies)
- Government issued ID, including driver’s license or passport
- Employment status
- Annual income and net worth
- Type of account
- Investment objectives, such as risk tolerance or types of funds you want to invest in
- How to handle cash or dividends in the account
If you decide to open a regular taxable brokerage account, you may be asked if you want to open a cash or margin account. A cash account is the standard brokerage account and is what new investors should choose. A margin account lets you borrow money from the brokerage to invest, and you pay interest on this loaned money. Margin accounts come with a variety of risks and are typically not recommended for the average investor.
When you’ve completed the paperwork for the account, you will be asked to fund the account. Most brokerages will let you fund the account from a checking or savings account. In some cases, you may also complete a wire transfer or mail a check. It may take several days before the funds appear in your account. Once the funds are available in your account, you can begin investing.