What You Must Consider Before Opening a Brokerage Account

Shopping for a brokerage account is very unlike choosing a bank.

People often choose a bank based primarily on a convenient location.  Since banks are tightly regulated, and all provide essentially the same services, convenience can be the deciding factor.

There’s a lot more to consider when opening a brokerage account however, since the transactions you enter into with investments will be both more complicated and more diverse.

Consider the Following When Opening a Brokerage Account

Investment choices

How important investment choice is to you will depend on what you intend to do with the account.

For the most part, you’ll want a brokerage account that has the widest investment choices available.  That will include stocks – both foreign and domestic – mutual funds, ETF’s, options, REITs, bonds and other debt securities, and even commodities.  You’ll also want the investment choices within each asset class to also be as wide as possible.

But if you plan to maintain the account for a very specific purpose, you may be more interested in a specialized account.

For example, if you plan to trade options as your primary activity, you’ll be more concerned with the choices and the execution capabilities of the broker over the sheer number of asset classes it offers.

You’ll also be interested in the amount of financial information provided, especially free information.

As an investor, you need information and you need it as quickly as you can get it.  You’ll not only want streaming stock price updates, but also the latest news, research and technical analysis to help you in your investment decisions.

Ability to link to outside accounts

As an investor, you’ll want to be able to move your money from one account to another quickly, easily, and at the lowest cost.  The best way to do this is generally through linking your brokerage account to your checking account, savings account and even loan accounts if you also want to pay bills through the account.

A brokerage account should make this process as easy and as inexpensive as possible.

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There are brokerage accounts now that even have check-writing options off of money-market accounts.  And many brokerages are owned by banks making transferring money between accounts smoother.  You need to consider if having your banking in the same place as your investments works for you (some people don’t like having all of their accounts in the same place).

For example, I can fund my ShareBuilder account instantly from my Capital One 360 Savings account since they are both the same parent company.  If I wanted to fund the account from a different bank it might take a few days for the money to go through.

If you want to learn more about ShareBuilder, one of the online brokers I use, then take a look at our detailed review.

Costs

Picking stocksObviously you will want to take a close look at transaction fees.  This is especially important if you are a frequent trader.

If, for example, you make 100 trades per year, the difference between a firm that charges $7.95 per trade versus one that only charges $5.95 per trade can be substantial.  That difference will result in $200 in extra transaction fees per year.

Still, you’ll have to match this against other fees charged by both brokers to determine which is the better deal.

Some firms charge an annual fee – under various titles – and others charge no annual fee at all.  For the example above, you’ll find you’re actually better off paying $7.95 per trade if that broker has no annual fee, as compared to the one that charges $5.95 per trade but also has a $300 annual fee.

There other charges to consider as well.

Some firms may have inactivity fees, low balance fees, and charges for banking services that you use frequently (or infrequently even).  Low balance fees can be particularly significant.  If your account will have a relatively low balance, say less than $10,000, the fees will generally be higher as a result.  In this case you will have to look for a broker that specifically markets to small investors through low or nonexistent fees for small balances.

You may find that these soft costs outweigh the benefits of going with one that charges the lowest transaction fees.

Related: Best Online Discount Brokerages

Convenience

Since most brokerage accounts are handled online today, convenience is mostly about ease-of-use on the site.

Some sites are better than others, but this is also a factor that can change over time.  Some sites can improve after a rough start, others can show signs of decline, perhaps due to the addition of incompatible applications.

Depending on your preferences, you may also want a broker with physical locations in your area.

For some investors, this can even outweigh the efficiency of the website.  At a minimum, it gives you the ability to speak with a live person face-to-face if you need a problem resolved.

And speaking of problems…

Customer service

Sooner or later you’ll either a) want to do something is out of the ordinary, or b) have a problem that you cannot resolve on the broker’s website.  When that happens you will need to get assistance from real people.

How well the broker handles the exchange can be a major factor in determining whether to go with one broker as opposed to another.

Even if you are working with a broker that has such an efficient website that nothing bad happens 99.99% of the time, there will be that event – once or twice each year – that will define your entire experience with the company.  If they are able to resolve the problem to your satisfaction, you’ll be a customer for life – or at least until the next problem pops up.  If not, you may decide that low fees or not, you’re going to take your business elsewhere.

There are two major sides to the customer service experience.

The first is your ability to get a hold of someone in a reasonable amount of time.  The last thing any of us ever want when we’re trying to fix a situation gone bad is to be routed through a voicemail maze, or to be kicked out somewhere along the process.

The second is the ability of the representative to solve your problem.  In some companies, customer service people are empowered to fix problems.  In others, they are tied into a bureaucratic maze that makes solutions hard to come by, and slow in coming when they do.  No amount of low fees will overcome the inability of a broker to fix a problem that will cost you a bunch of money if they can’t.

Related: See Your Investments Accounts in One Place With Personal Capital

Reputation

Has the brokerage been in the news lately?  Why?

What are customers and the press saying about the brokerage?

Before you pull the trigger on on a brokerage check to see its reputation.  I want to know if there have been any major fines or scandals that the brokerage was involved in.  Also check to see what users are saying about the brokerage.  You want to know why people may be unhappy.

Finally

Don’t take opening a brokerage account lightly.  As simple as it is these days to open one up and start investing you still need to do your homework first to make sure the brokerage fits your needs.

What are some things you would look for when opening a brokerage account?

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Published or updated September 6, 2014.

Comments

  1. Fortunately, since most brokers are online today (like you mentioned) that should make switching brokers relatively painless and therefore make these considerations that much easier to implement.

    • Glen Craig says:

      It it a lot easier to research brokers and moving has become easier. Still, you have to watch out for any fees a broker may impose for moving your account. Some brokers will cover this fee when they get your business.

  2. Good post! Having worked in the industry myself there are a many number of things to be looking for and you covered mot of them. For me, the services offered as well as the convenience/customer service are the key things to look for. I am not a huge trader so cost, while is important, is generally not the deciding factor for me. I want a brokerage that will allow me to invest in things I want to invest in as well as one that I can reach anytime I need to whether that be by phone or instant chat. One thing I would also add is having a brokerage that makes it easy to access and download all of your records. I like to be able to download all of my stuff monthly and it needs to be easy to do so.

    • Glen Craig says:

      Good points! These days it should be easy to get your records but not all sites have the same usability.

  3. Sandi Martin says:

    Don’t forget about purchase minimums, especially for the small investor or someone who wants a monthly investment plan.

  4. Great post, I have always found Etrade to be reasonable with their fees and their customer service has been great in my experience. To me customer service is of the utmost importance as I am not a trader. Thanks for the info!!

  5. I use Etrade because everything is easy to use and simple to understand. I can always lie and say it’s not because of the baby ads! :)

    But I believe a key component in the array of resources to use is an “old school” savings account. Reason it works for me is that’s an easy place to put the “pennies” — small amounts you easily call “too small to invest.” Once or twice a year I raid what effectively becomes an online piggy bank and add another grand or two to the brokerage account that would otherwise have gotten frittered away. (“Hey, Honey, we have an extra fifty left over. Where you wanna go eat?”)

    • Glen Craig says:

      Great advice! Those small amounts add up and when you can put them to work as an investment…even better.

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