Learning how to invest money can be an excellent way to improve your financial situation and potentially build wealth. But with so many different brokerages out there, it can be challenging to know which one is right for you.
Some are geared toward people who want hands-on assistance, and others simply give you some resources and let you figure it out yourself.
If you’re looking to start investing, here’s how to choose a brokerage that aligns with your needs and long-term goals.
How to choose a brokerage: the basics
There are three main types of brokerages:
- Full-service brokers
- Discount brokers
Each of these offers a unique approach to investing, and the right one for you depends on your individual needs, preferences, budget, and goals.
You may have already asked around for recommendations from friends and family. But just because a brokerage is a good fit for someone you know, it doesn’t necessarily mean it’s the right fit for you.
Full-service brokers vs. discount brokers vs. robo-advisors: what’s the difference?
Developing a basic understanding of how different brokerage firms work is the first step to determining which one is the best option for you. Here’s how each type of broker works.
As their name suggests, full-service brokers, like Fidelity, Edward Jones, and Charles Schwab, provide a wide range of products and services for investors, including hands-on assistance from a financial advisor who helps manage your money.
You may also get access to special services and products that you can’t enjoy with discount brokers and robo-advisors. These could include initial public offerings, limited partnerships, estate planning, private investment funds, and more.
The drawback to full-service brokerage firms is that they’re expensive. Where you can typically trade commission-free with many discount brokers, you may be charged $150 per trade with a full-service broker. Alternatively, you may be able to trade for less in exchange for an annual fee, which can be up to 1.5% of your assets.
That may not sound like a lot, but those fees add up over time, especially as your portfolio grows. As a result, full-service brokers are best suited for investors with high net worths who can afford to pay steep fees for professional assistance.
Discount brokers, like Stash and Robinhood, provide many of the same investment opportunities as full-service brokers, but at a discount. In fact, many don’t charge any fees when you buy or sell securities.
Instead of providing you with hands-on assistance, discount brokers are primarily a self-service arrangement. You typically do all the research and make the trades. Of course, many of these brokers offer helpful information about everything from basic investing terms to how to invest wisely and responsibly.
In some cases, you may be able to pay extra for additional services, such as having a professional help manage your portfolio. But for the most part, you’re on your own. What’s more, you typically won’t get access to specialized services like IPOs.
But if you’re a relatively new investor who wants to learn the tricks of the trade, or you’re experienced and want to keep your costs down, a discount broker can be an excellent choice.
Robo-advisors are relatively new to the investing scene — the first firms were launched during the Great Recession in 2008. These firms use algorithms to fully automate the investing process, making it completely hands-off for investors.
For example, when you sign up with a robo-advisor like Betterment, Wealthsimple, or Wealthfront, you’ll answer some questions about your investing goals and risk tolerance, and it’ll suggest a certain mix of stocks and bonds. For instance, 90% stocks and 10% bonds for someone with a long-time horizon and pretty aggressive goals. This can be an effective way to build passive income over the long-term.
Robo-advisors typically charge low fees as a percentage of your portfolio, often under 1%. In some cases, you may also be able to pay an additional fee to get access to a financial advisor.
Robo-advisors are best for new and experienced investors who want someone else to do all the work but don’t want to be hampered by high costs. However, the fact that you can’t choose individual stocks, ETFs, mutual funds, or other securities may be unappealing for someone who wants more control over how their money is invested.
How to choose a brokerage: 7 factors to consider
As you compare different types of brokers within the same category, here are seven features to look for as you decide which is right for you.
1. Fee structure
There aren’t any brokerage firms out there that charge no fees whatsoever. But some are definitely more generous with their fee structures than others.
As you compare brokers, research how and when you’ll be charged. For example, do you pay a transaction fee every time you make a trade or only for certain types of trades? Is there an annual maintenance fee, and how much does it cost?
Run some numbers based on your portfolio size and how often you plan to trade to get an idea of how much each broker will cost you.
Virtually all brokers provide at least some resources to help you research the market, but some are better than others. What’s more, some provide excellent tools such as calculators, fundamental and technical analyses, real-time financial news, and more.
As you shop around, think about the type of resources you need in order to learn and achieve your investing goals. Also, remember that some brokers charge costly fees for providing more resources, so compare those to determine which one will give you the most bang for your buck.
3. Your experience
If you’re just starting out with investing, a robo-advisor or a discount broker may be a better option than a full-service broker. And depending on how much involvement you want with your portfolio, a discount broker will give you more control, whereas a robo-advisor is a completely hands-off experience.
4. Accounts offered
There are many types of investment accounts, but not all brokers offer the same ones. For example, if you want to open an IRA or a 401(k) for your business as the owner, you may not have that option with some brokers or robo-advisors.
Think about your goals to determine the right account for you, then look to see which accounts different brokerage firms offer.
5. Investments offered
For most people, the primary securities they invest in are stocks, bonds, ETF funds, and mutual funds, and most brokers offer access to all of these. However, if you want the chance to invest in other securities, you may need to double-check to make sure the brokers you’re considering offer them.
These securities may include:
- Foreign stocks
- Foreign currencies
- American depository receipts
Also, keep in mind that although robo-advisors primarily invest your money in funds made up of stocks and bonds, you don’t have any control over which funds they choose.
6. Your investment style
Ask yourself how you want to approach investing. Do you want to learn how to manage your portfolio on your own, including tax planning and rebalancing when your original allocations are off? Or would you prefer someone else to do all of the legwork for you?
Think about whether you want to be an active or passive investor — and note that your preferences may change over time, so you aren’t necessarily locking yourself in with what you choose now.
7. Platform access
Some brokers provide better access to your portfolio and the investing platform than others. For example, some brokers offer fully functional mobile apps, which can be beneficial if you want to do all of your trading from your phone. Others may allow you to do some things from a mobile app but may require you to log in online to get full access to tools and resources.
FAQs about choosing a brokerage
As you continue to consider your options, here are some answers to questions that may come up.
Do I need a broker to buy stock?
It is possible in some circumstances to purchase shares in a company directly from the company that’s providing them. But for most investors, those opportunities aren’t available. In general, you’ll need to open an account with a brokerage firm to buy and sell stocks.
How much money do you need to start a brokerage account?
Some brokerage firms may require you to have a minimum opening deposit, which can range to a few hundred dollars to a few thousand. And if you want to work with a full-service broker, you may need a significant balance to be considered.
However, there are many discount brokers and robo-advisors that have no minimum opening deposit requirement, so you can start investing with very little cash.
How do you invest in stocks with little money?
If you don’t have a lot of cash on hand, you may be limited in which securities you can buy. However, some brokerages such as Stash are making it even easier for anyone to get started in the stock market through what’s called fractional shares. These securities allow you to purchase a fraction of a full share of a company.
For example, instead of buying one share of Amazon at about $2,600, you could invest $50 and get roughly 2% of one share. You’ll still participate in the stock’s price fluctuations but at a reduced proportion.
What is the best brokerage account for beginners?
There’s really no best brokerage account for everyone, even among beginners. As a result, it’s essential to take time to shop around and compare various options before settling on one.
How to choose a brokerage: The bottom line
As an investor, choosing the right brokerage is crucial for helping you achieve your investing goals. Depending on your experience, investment style, preferences, and budget, one broker may be better suited to your needs than others.
The important thing is to take the time necessary to vet different brokers so you can settle on the right one for you. If you need some help getting started, check out our picks for the best investment apps.