What is a Brokerage Account

A brokerage account is an arrangement between an investor and a licensed brokerage firm permitting the investor to deposit funds with the firm and place investment orders through the brokerage. The investor owns the assets contained in the brokerage account and must usually claim as taxable income any capital gains he incurs from the account.


Brokerage Account

BREAKING DOWN Brokerage Account

There are several different types of brokerage accounts and brokerage firms; investors can choose the type of brokerage account and broker that best suits their financial requirements.

Some full-service brokers provide extensive investment advice, charging high fees for their efforts. Most online brokers simply provide a secure interface through which investors can place trade orders and charge relatively low fees for their services. Brokerage accounts can also differ in terms of order execution speed, analysis tools used, scope of tradable assets and the extent to which investors can trade on margin.

Full-Service Brokerage Accounts

Investors seeking the expertise of a financial advisor should look to the services that are provided by a full-service brokerage firm. The most well-known full-service firms are Merrill Lynch, Morgan Stanley, Wells Fargo Advisors and UBS. Financial advisors are paid to help their clients develop investment plans and execute the transactions accordingly. Financial advisors can work on either a nondiscretionary basis, where the client must approve any transaction, or on a discretionary basis where client approval is not needed.

Full-service brokerage accounts have two types of fee structures, either on a commission or advisory fee basis. A commission account generates a fee anytime an investment is bought or sold, regardless of whether the recommendation came from the client or the advisor. Accounts based on advisory fees have a flat annual fee, ranging from 0.5% to 1.5% on the total account balance. In exchange for the fee, no commissions are charged when investments are bought or sold. Investors should determine the most cost-effective option by discussing fees with the financial advisor at the start of the relationship.

Discount Brokerage Account

Investors looking for the do-it-yourself brokerage option may be interested in using discount brokerage firms. These firms have significantly lower costs than full-service brokerage firms. However, like the name suggests, a discount brokerage firm offers fewer services in exchange for lower fees. Firms like Charles Schwab, Scottrade, E*Trade, Vanguard and Fidelity are examples of the most popular firms that offer these services. Investors can complete low-cost investment trades via easy-to-use online trading software coupled with research and analysis.

For example, as of March 2018, an investor who signs up with E*Trade could open a regular taxable brokerage account or retirement account at no cost with a minimum of $500. To buy or sell a stock, option or ETF, the commission would be $6.95 per trade. Treasury bonds are $0 per trade and secondary bonds are bought at $1 per bond (with a minimum of $10). E*Trade also offers a variety of institutional no-load mutual funds for $0 per transaction.

Online Brokerage Accounts and Downward Price Pressure

The rise of online and mobile brokerages has coincided with heightened pressure to cut trading prices and minimum account requirements. In February 2017, Fidelity Investments announced it was lowering its per-trade commission on stocks and exchange-traded funds to $4.95 from $7.95, and Charles Schwab immediately followed suit, cutting its baseline pricing on trades to $4.95 from $6.95 — pricing that's current as of March 2018.

Online brokerage Robinhood, which launched in early 2015 under a mobile-only platform, has no minimum account requirements (except for on its margin accounts) and offers commission-free trading. Bypassing commissions, the firm says it collects revenue from interest on uninvested cash sitting in customer accounts, monthly fees on subscription accounts for margin trading, and interest on margin lending. Robinhood announced in November 2017 that it had surpassed 3 million brokerage accounts and exceeded $100 billion in transaction volume. To compare, E*Trade reported at the end of 2017 that it had about 3.6 million brokerage accounts and $311 billion in assets under management (AUM).

The benefits of zero-fee trading, however, come with drawbacks. As of March 2018, Robinhood lacks the investment advice and research offered by more-traditional brokerages, and it also doesn't support annuities or retirement accounts, although the firm says it hopes to support the latter in the future.