Varieties Of Brokers And How To Pick The Best One

By Aaron Levitt | July 11, 2012 AAA

As of 2007, there were more than 111 million brokerage accounts in the United States and that number continues to grow larger every year as more people are taking control of their finances and retirement assets than ever before. Interest in opening brokerage accounts has skyrocketed. However, getting started on the road to financial independence can be a daunting task. Just as there are many types of individual investors, there are equally as many types of brokerage houses. Luckily, we here at Investopedia have done some of the leg work to help you choose and avoid some potential problems.

It All Comes Down to "How Much Hand Holding"
The real issue in choosing what kind of broker is the best fit for you comes down to how much professional guidance you need. If you are well versed in a variety of investments, including stocks, bonds and options, and prefer to do your own research, less hand holding could be needed. Ultimately, that could save you some dough on fees. Likewise, if you don't know the difference between preferred stock and livestock, it may make sense to seek professional help. Generally, brokerage firms are divided into two main categories based on the level of service provided: full service and discount.

Full-service firm's often charge the highest fees, but with those higher costs come several perks. Full-service firms, like Raymond James, usually have in-house research teams who research and recommend stocks to buy, and customers are usually given their own personal broker who receives a commission for selling the investment. The full-service firms also offer other various financial services including banking, loans and estate-planning services. Again, all of the perks and guidance can come with higher fees and account minimums.

For those investors who feel pretty confident on their ability to navigate the markets, discount brokers could be the way to go and the online revolution has made using a discount broker even better. Many discount firms, like Charles Schwab, have embraced the Internet and now offer web-based brokerage platforms geared toward individual investors. This includes independent third-party research and news that you can use to form your own investment portfolio. These online discounters are usually the cheapest way to purchase investments - with commissions costing between $5 and $15 per trade - but you must know the basics of investing before you can use these services. However, more and more online brokerage firms are now providing full-service brokerage-like offerings in their product mix.

The Best of the Rest
There are some other brokerage account options for investors. First, there are the captive brokers. Many mutual fund companies now offer the ability to trade stocks and funds through your accounts at the firm. The captive brokers are the ones who facilitate those trades. These brokers are often encouraged to sell the firm's own mutual funds rather than ones from other companies. This can create conflicts of interest as the broker's investment recommendations may not be the best choice for the individual investor.

Despite the fact that they are becoming a dying breed, there are still a handful of independent brokers around. These firms are not part of a major chain or giant investment bank and usually only have a few regional offices. Overall, these brokers act like full-service firms, but are more inclined to give unbiased advice. However, fees are generally high and the risk of using a one-of-one firm could be great. Investors who used Florida-based White Elephant Trading Company, found out the hard way that managers at the firm used investors' money to make payments to other investors (i.e., a Ponzi scheme). While fraud can happen anywhere, it's less likely a big firm with a national or international presence.

Finally, for those investors looking for more alternatives in their portfolios, both future and foreign exchange brokers offer ways to tap these asset classes. While some broad full service and discount brokerage firms offer these products, there are a handful of firms that specialize strictly in these alternative assets. At its core, forex trading involves buying and selling baskets of global currencies and represents the largest marketplace in the world, while futures brokerages allow investors to tap into options strategies, buy and sell commodities as well as bet on various financial derivatives. As with the rest of the investing brokerage world, there are different levels of service - and commission pricing - available in these two specialized categories. Investors, again, will need to choose whether they want to talk to a person or just enter their order on a website.

The Bottom Line
With more people taking control of their financial futures, the number of newly opened brokerage accounts continues to climb. However, getting started and figuring out what kind to use can be a daunting task. The real key is figuring out just how much help you need in selecting investments. The previous rundown gives a great overview on selecting the right amount of help and what kind of account to pick.

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