Picking your stockbroker is not much different from picking a stock. It starts with knowing your investing style—and of course, determining some investment goals (beyond making money, of course).
Today you have more options in brokers than earlier generations ever did. But of course, variety of choice—while welcome—can make decisions more complicated, too. Let's look at the types of brokers out there, how they work and how they charge, along with some all-around thoughts about questions to ask and research to do, whatever sort of financial advisor you're leaning towards.
Retail brokers fall into two basic categories: full-service brokers and discount brokers.
- Your choice of broker should reflect your investment style—whether you lean towards active trading or a more passive, buy-and-hold approach.
- Always make sure your broker is fully licensed by state regulatory authorities and FINRA, and registered (individually or via their firm) with the SEC.
- Key questions to ask a broker include "How do you charge for your services?" and "Do you hold to a fiduciary standard or suitability standard?"
- Robo-advisors can be a cheaper alternative to human brokers, but don't allow for advice or participation on your part.
What Is a Broker?
There are two types of brokers: regular brokers who deal directly with their clients and broker-resellers who act as intermediaries between the client and a larger broker.
Regular brokers generally are held in higher regard than broker-resellers. That's not to say that all resellers are inherently bad, just that you need to check them out before you sign up. Regular brokers such as those who work for TD Ameritrade, Capital One Investing, and Fidelity are members of recognized organizations such as the Financial Industry Regulatory Authority (FINRA) and the Securities Investor Protection Corporation (SIPC).
A broker acts as an intermediary between an investor and a securities exchange—the marketplace where financial assets are bought and sold. Because securities exchanges only accept orders from individuals or firms who are members of that exchange, you need a broker to trade for you—that is, execute buy and sell orders. Brokers provide that service and are compensated either through commissions, fees, or being paid by the exchange itself.
A broker can be just an order-taker, executing the trades that you, the client, want to do. But nowadays, many brokers style themselves as "financial advisors" or "financial representatives" and do much more. As well as executing client orders, brokers may provide investors with research, investment planning and recommendations, and market intelligence.
Full-Service Brokers vs. Discount Brokers
There is a further distinction between full-service brokers and discount brokers. As the name suggests, full-service brokers routinely offer individual advice and recommendations, and these services don't come cheap. A full-service broker does much of the legwork for the investor.
Discount brokers generally leave you to make your own decisions, although many offer the option to solicit a broker for advice on a particular trade for a fee. Some recommend a full-service broker for new investors. But frankly, it's often not feasible for a young person to go with a more expensive full-service broker.
Today's online discount brokers typically provide a vast array of tools for investors of all experience levels. You'll learn a whole lot more about investing if you do the legwork yourself.
Costs and Fees
If you're under 30, chances are you're limited by your budget. Trade execution fees are important but there are other brokerage fees to consider. Knowing the fees and other charges that might apply to you is essential to making the most of your investment dollar. Here are some costs to consider:
- Minimums: Most brokers require a minimum balance for setting up an account. Online brokers typically have the lowest minimums, ranging from $500 to $1,000.
- Margin accounts: A new investor might not want to open a margin account right away, but it's something to think about for the future. Margin accounts usually have higher minimum balance requirements than standard brokerage accounts. You also need to check the interest rate that your broker charges when you make a trade on margin.
- Withdrawal fees: Some brokers charge a fee to make a withdrawal, or won't permit a withdrawal if it will drop your balance below the minimum. On the other hand, some allow you to write checks against your account, although they typically require a high minimum balance. Make sure that you understand the rules involved in removing money from an account.
Some brokers have complex fee structures that make it harder to figure out what you'll be paying. This is particularly common among broker-resellers who may use some aspect of a fee structure as a selling point to entice clients.
If a broker seems to have an unusual fee structure, it's all the more important to make sure that it's legitimate, that it will suit your best interests, and that the fee structure complements your investing style.
If the rates seem too good to be true, read the fine print in the account agreement and fee summaries. Additional fees can be hidden there.
Your choice of broker should be influenced by your investment style. Are you a trader or a buy-and-hold investor?
Traders don't hold onto stocks for a long time. They're interested in quick gains greater than the market average based on short-term price volatility, and they may make many trade executions over a short time span.
If you envision yourself as a trader, you'll want to look for a broker with very low execution fees, or trading fees could take a big bite out of your returns.
A buy-and-hold investor, often called a passive investor, holds stocks for the long term. Buy-and-hold investors are content to let the value of their investments appreciate over longer periods of time.
Many investors will find that their investing style falls somewhere between the active trader and the buy-and-hold investor, in which case other factors will become important in picking the most appropriate broker.
Vet Your Broker
Of course, you want your broker to be someone you get along with. But there are also certain criteria every broker should meet.
The broker, or the firm they're affiliated with, should be a registered investment advisor (RIA). This means they are on record with, and under the regulation of, the SEC.
The individual broker should be registered with FINRA, the trade organization which oversees the financial industry on the government's behalf.
To buy and sell securities, a broker has to have passed certain qualifying examinations and be licensed by your state securities regulator before they can do business with you. At a minimum, the broker should have passed the Securities Industry Essentials (SIE) Exam (if they entered the profession after 2018) and the Series 7 General Securities Representative Exam, which allows them to sell most types of stocks, bonds, and exchange-traded funds (ETFs).
Most brokers also take the Series 6 Investment Company and Variable Contracts Products Representative Exam, which allows them to sell packaged investment products such as mutual funds, variable annuities, and unit investment trusts (UITs).
You can obtain background information on a broker—including registration, employment history, licensing, and disciplinary actions—by looking them up on FINRA BrokerCheck.
Questions to Ask Your Broker
Aside from specific discussions about your goals, appetite for risk, and individual investments, ask your broker these questions before you get started:
- How are you compensated? Fees, commissions, or a combination?
- What other charges do you or your firm have—transaction fees, account maintenance fees, etc.?
- Are you or your firm associated with any of the companies whose investment products you might recommend?
- Will I have access to my account online?
- How often will I receive statements?
- How often will you review my portfolio and investment plan?
- Do you subscribe to the fiduciary standard or just the suitability standard?
As an alternative to a human broker or broker-reseller, it's worth investigating the pros and cons of using a robo-advisor.
Robo-advisors are automated trading and investing platforms. They use computer algorithms to select and manage investment portfolios, with little to no human interaction, beyond the original programming—though some services are supplemented with live support from real people.
Typically, an investor signs up with a robo-advisor online. They provide information about their investment goals, time horizon, and risk tolerance. While some platforms will ask only basic questions, others will pose a more detailed range of queries. Based upon that information, the robo fashions a portfolio, and adjusts it periodically.
One big pro of rob-advisors is the cost. Algorithms don't eat very much. As a result, robo-advisors are a lot cheaper than human advisors: Robo-advisors charge between 0.02% and 1% of investment funds annually, compared to traditional wealth managers' fees of 2% to 3%, according to a Deloitte database of 100 providers.
Robo-advisor platforms usually have lower account requirements than regular investment managers—a few hundred or thousands, vs. five or six figures. And they're easy to enroll in.
On the downside, there's not much choice or personalization. Robo-advisors primarily invest in (ETFs)—another reason their services come so cheap—and they tend to slot you into pre-determined model portfolios, based on your risk tolerance and basic needs (appreciation, income, etc.).
And of course, you can't chat with them. They're not great for financial planning or providing counsel on saving to buy a house or retirement. Most of them won't let you buy any investments on your own, like individual stocks or bonds, either. Despite the "advisor" in their name, robos really function more like money managers who have discretionary power over your portfolio.
The Bottom Line
There are a number of factors to consider when picking your first broker. With Investopedia's online broker reviews we've created the most comprehensive toolset to help traders of all styles make informed, efficient, and intelligent decisions on the right online broker.
Your first broker won't necessarily be your broker for life. Your life will change, and your needs as an investor may change along with it. But you have a much better chance of making money as an investor if you put in the time it takes to choose the right broker to start with.