Which type of brokerage account is right for you?

A broker, also known as a brokerage firm, is a company that connects buyers and sellers of investment instruments such as stocks and bonds. A brokerage account is usually where investors keep their assets. Generally speaking, there are three types to choose from. Which type you choose depends on your needs and preferences.

key takeaways

  • A brokerage account is a financial account where investors buy and sell securities with a licensed brokerage.
  • Different companies target different investors based on experience, desire for support, and asset levels.
  • Traditional and online self-guided programs are popular with investors of all kinds, especially those who prefer to research and interact with interfaces rather than humans.
  • Human advisors are a better option for those who would rather interact more directly with financial professionals.
  • Robo-advisors automate investing and use technology to manage your portfolio.

A Brief History of Brokerage Firms

Before the mid-20th century, access to the stock and bond markets was limited to those with sufficient funds to invest and use the services of human brokers.

The 1970s and 1980s saw the emergence of “discount” brokerages such as Vanguard and Charles Schwab. They are willing to accept less affluent clients because their business model is designed around the number of investors.

Online brokerages such as E*TRADE, FOREX.com, and Ameritrade (now TD Ameritrade, a division of Charles Schwab) thrived at the turn of the century, seizing the opportunities created by the Internet. The new technology reduces costs and allows them to expand the discount brokerage model by reducing commissions and minimum balances.

Brokerage firms exist to give the public access to exchanges. Without a broker, there would be no investing today.

The rise of self-investment

Online brokerage accounts bring self-directed investors. The investor conducts investment research and chooses which stocks and bonds to buy for his portfolio.

Also, a new development in the past few years is the emergence of robo-advisors. These automation software platforms are usually available in the form of mobile apps that handle almost all of your investment decisions at a lower cost.

Arguably the first robo-advisor — and the first to offer a cryptocurrency portfolio — Betterment launched after the Great Recession in 2010. Since then, robo-advisor adoption has grown exponentially, with a slew of startups and existing brokerages adding robo-advisor divisions.

There are a plethora of traditional, discounted and online self-directed brokerage platforms available, each with their own pros and cons.

Human Resources Brokers and Financial Advisors

Some people prefer to let one person handle their finances. If this is you, a traditional advisor may be a better fit than a robo-advisor. Human brokers and financial advisors have been around since the inception of the modern stock market, and they have carved out space in today’s competitive landscape by catering to investors with higher net worth or those who prefer human connections.

Good financial advisors build and monitor portfolios and advise clients on many aspects of their financial lives. They also provide ancillary services such as insurance, estate planning, accounting services and lines of credit.

Clients of these brokers can expect to pay advisors 1% or more of their assets under management; at times, they may pay a single transaction fee of up to $50 per trade. Many advisors claim the fees are well worth the extra value they bring, such as picking stocks for a client’s portfolio, accessing unique products and offerings, or developing a comprehensive financial plan.

Many advisors are reachable by phone or email and respond quickly. They can also meet with clients in person when needed.

When comparing brokerages, pay attention to what the advisor is telling you. Brokerages may ask them to push prepackaged investment, fund or financial plans; if this is the case, make sure you ask if a plan is in place to suit your needs.

Also, pay attention to the charges. If they charge more than 1%, ask why and judge for yourself if the extra fee is worth it. Professional certifications such as CFP (Certified Financial Planner) or CFA (Certified Financial Analyst) indicate that your broker has been trained and passed a series of rigorous exams related to financial markets and planning.

You can also use FINRA’s BrokerCheck tool to see if their brokers are subject to regulatory complaints or ethical violations.

Online Self-Service Broker Account

Online autonomous platforms include E*TRADE, TD Ameritrade, Robinhood and more. Be sure to check with your bank – you may already have access to a self-directed online brokerage account.

For the most part, these platforms let you decide for yourself which investments are the best, but they usually offer a suite of research and analysis tools. Many offer expert advice and insights to help you make an informed decision. You can then execute trades yourself to build your portfolio through their website or mobile app.

Human advisors charge higher fees than robo-advisors or platforms that facilitate self-directed investing — which tend to charge a per-transaction fee.

These platforms charge a per-trade commission for each stock trade and an additional fee for each options contract. Additionally, they allow you to trade on margin and create options strategies. You can also invest in mutual funds, individual stocks, foreign exchange (forex) and exchange-traded funds (ETF).

Online brokerage firms are best for self-directed investors who understand the market or conduct research to choose a portfolio that best suits their goals. If you only make a few transactions a year, you may want to pay more per transaction for higher quality research and analysis. If you’re a day trader, you might want to consider a site that offers free trades to its most active users.

robo-advisor

Robo-advisors automate investing and use technology to manage your portfolio. Since Betterment launched in 2010, the number of startups and existing financial firms offering this algorithmic trading service has exploded.

Unlike the trading algorithms that power hedge funds and banks’ high-frequency trading (HFT) desks, robo-advisors may use low-cost index ETFs to put your money to work. In fact, the fusion of ultra-low-fee ETFs with low-cost technology solutions available on mobile platforms makes robo-advising possible.

You can now invest $1 on some platforms for a fee of 0.15% per year. Many venues do not charge consultation fees, but do charge optional add-ons.

Before robo-advising, if you only had a few hundred or a few thousand dollars to invest, you had to go online to an autonomous platform. Now you can put $200 or $2,000 into work without having to do any investment research, pick any individual stocks, or worry about rebalancing your portfolio.

Algorithm-based robo-advisers are designed to place you in an efficient and diversified passive portfolio. Many of these platforms will even optimize your portfolio through tax loss harvesting, a process by which investors sell losing positions to offset capital gains from winning positions. The algorithm itself is a proprietary company secret of the robo-advisor.

Robo-advisors are great for new or young investors who don’t have much investment. These platforms are also suitable for those who prefer passive investing strategies, as your robo-advisor develops an indexed ETF portfolio on your behalf.

Robo-advisors also shine for long-term investors who lack the time or are eager to research and find ETFs that meet their investment needs and strategies.

If you are a more sophisticated investor or trader who needs margin, options trading, and technical charts, a robo-advisor may not meet your needs.

But robo-advisors are certainly not for everyone. Many brokers are adapting their robo-advisors to allow for more customization in their portfolio choices. However, this defeats the purpose of these products – to build and maintain a growing portfolio.

If you choose a robo-advisor, the main factors to consider are cost, reputation and additional services. Make sure to monitor the cost of additional services: some are free, but some may add additional fees.

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