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Q: How do you pick the right broker? I know I should invest, but I just really don't trust myself to do it right. There's just so much to think about, so I think I'd like to go with a broker. But I'm not sure how to pick one of those either. Help!!
-- Todd, Akron, Ohio
A. Hi, Todd. By the nature of your question, it's clear that you are just starting out as an investor. So you should be spending time learning as much as you can about investing before deciding alone which stocks and funds are best for you. In fact, you may never have the time and energy to do all the homework necessary to stay informed about investing moves.
That's why a full-service broker is surely a good option for you. Note these are different brokers than the "online brokers" such as E-Trade (Nasdaq: ETFC) or TD Ameritrade (NYSE: AMTD), which allow you to trade stocks for rock-bottom fees, but offer minimal investing advice or counsel.
You've probably heard of all of the leading full-service brokers, as they likely have a branch office right in your town. The top six full-service brokers (ordered by the number of brokers they employ) are:
- Morgan Stanley
- Merrill Lynch
- Wells Fargo Advisors
- Edward Jones
- Raymond James
There are many other good options, though some firms don't have the same armada of brokers operating out of retail offices and instead rely on telephone and Web-based customer support. For example, Fidelity Investments (NYSE: FNF) and Charles Schwab (NYSE: SCHW) handle as many accounts as the firms noted above, but they may not have an office near you.
Another distinction: The full-service brokers noted above, such as Morgan Stanley (NYSE: MS) and Merrill Lynch, offer a suite of financial planning services -- which can include estate planning and long-term wealth management strategies that may be better tailored to your needs.
If you think that sounds like what a financial planner can do, you're right. Today's full-service broker is expected to know much more than just investments. They should be reasonably knowledgeable about taxes, insurance, family trusts and other topics, and will advise you on how to structure your portfolio in the context of your long-term financial goals.
Every year, ratings firm J.D. Power & Associates polls several thousand investors to see which firms deserve high marks and which ones are to be avoided. You can read about the 2012 rankings here.
Advice Doesn't Come Cheap
Since these brokers are expected to take a good deal of time to get to know your financial needs, they won't work with just anyone. They aim to charge hundreds of dollars a year -- in fees and/or commissions -- which is obviously not a realistic expense burden if you only have $5,000 or $10,000 to invest. If you are thinking about starting off with just a few stocks, and have less than $50,000 to invest, then you may be steered to an online customer service agent who can do little more than open an account for you.
If you do have enough assets to justify the use of a full-service broker, note this is a very competitive industry, so you are likely to pay similar amounts for the various fees that these firms charge. You can often choose between commission accounts, where you pay by the transaction, or a "wrap account," where you pay a prearranged quarterly fee, which is usually a percentage of the assets that the firm is managing for you.
So, now that you know the different kinds of brokers, what they are supposed to do for you and where to find the right one, what do you do?
The answer is simple. You need to identify the various retail branches of the major brokerage firms in your area, and then set up a time to meet with each one.
You'll be paired up with an investment advisor who can walk you through the firm's approach, the services offered and the various expenses you'll incur. The single most important factor in this assessment is your comfort level. You may be dealing with this advisor for many years to come, and it's crucial that you like and trust her. How they communicate with you now will indicate future responsiveness.
Suffice it to say, the more assets you have, the greater the attention you'll receive.
Worried about ending up with a fraudulent broker who will abscond with your funds? You shouldn't be. This is a heavily regulated industry, and the major firms must continually certify the integrity of their staff. The bad brokers are quickly weeded out, so it's likely safe to go with an advisor who has been in the business for at least five or 10 years.
Action to Take --> Full-service brokers are a great choice for investors with a considerable asset base and a complex set of long-term financial goals. Still, thousands of investors prefer the simple, low-cost route of an online broker. You really don't need to have a deep understanding of investments. Simply look into a handful of rock-solid funds such as the Vanguard S&P 500 ETF (NYSE: VOO), or high-quality companies with proven track records. Buy them and hold them, and if history is any guide, they'll steadily rise in value over the coming decades.
This article originally appeared on InvestingAnswers.com:
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