How to Choose a Brokerage Firm

The first step to choosing a brokerage firm you want to open an account with is to ask yourself: What are your investment needs and wants? Among the most important considerations are what types of investments you will make, which financial services you will use and what your investment style is.

Cost plays a role, but it is relative to the services you receive—especially as the competition between discount brokerage firms pushes commissions, fees and maintenance charges toward zero.

In some ways, it has never been cheaper or easier to invest as an individual investor. Notably, since the U.S. government deregulated the brokerage industry in 1975 and ushered in discount brokerages, individual investors have needed guidance in determining which brokerage firm in the inundation of choices is best for them.

As an investor, you need a broker to act as an intermediary between you and the security exchanges and investment marketplaces. Brokers are able to buy and sell securities such as stocks, bonds, exchange-traded funds (ETFs), options, etc. They are licensed by legal authorities and should be recognized members of organizations such as the Financial Industry Regulatory Authority (FINRA). Exchanges will only work with licensed and accredited brokers; you can’t trade securities for yourself as an individual investor.

Traditional brokerage firms are now typically referred to as full-service brokerages. A full-service broker not only executes your trades but also manages your investment decisions. If you do not want to do the work of managing your investments, look for a full-service brokerage, such as Edward Jones Investments. Keep in mind that full-service brokers charge more for their work and may place your money in proprietary investment products, including mutual funds with loads.

Discount brokerages give you a better deal on costs, with the understanding that you are responsible for your investment research and decisions. Large discount brokerages, like Charles Schwab Corp. (SCHW), offer their customers investment assistance and other services for an additional cost. Competition between discount brokerages has increased the amount of investment education, research and analysis offered to customers at little or no cost.

It is easy to underestimate the compounding effect of fees and maintenance charges over the long run on your investment return. Don’t pay for services you don’t need. If you are comfortable with computers, investing online with discount brokerages gives you the most freedom at the lowest costs.

What You Need to Open a Brokerage Account

Thanks to deregulation, subsequent competition between brokerages and the rise of the internet, almost any adult can open a brokerage account. The easiest way for most people would be online, but you are usually also able to open an account over the phone. If you are not comfortable with these options, you will have to find out which firms have offices in your area and go in person to get started.

Opening an online brokerage account requires the same information as opening a brokerage or banking account in person. You’ll need to verify who you are, provide tax-based identification, sign agreements and deposit an account minimum. However, most of the large discount brokerages have reduced their account minimums to $0. Note that account applications may also require you to designate whether you intend to purchase securities on margin or trade riskier securities such as options.

As for depositing money into your brokerage account, technology provides myriad ways to do this. Brokerages with mobile apps may allow you to deposit checks directly through the app. As was the case before widespread electronic banking, checks can also be deposited in person or sent to an office in the mail. You also have options to link bank accounts for electronic fund transfers or make wire transfers.

If you already have retirement accounts set up, it is becoming increasingly easier to transfer assets to a brokerage account, depending on the stipulations of your retirement plan. Large brokerages are willing to assist you in consolidating your retirement accounts under their purview, as tax- and cost-efficiently as they can, to win your business.

Transfer fees still vary across the industry by the brokerage firm. If you think you will eventually transfer or withdraw your funds, investigate each brokerage’s stipulations.

What Is the Best Stock Brokerage Firm for Beginners?

Beginning investors would usually want to look for a large discount brokerage offering no commissions for trading stocks and exchange-traded funds (ETFs), with an accessible mobile app and trading platform.

Most individual investors do not need a sophisticated trading platform. Basic trading platforms allow the most commonly used order types—such as market, stop and limit orders—and include securities such as stocks, ETFs, mutual funds and bonds. Individual investors don’t need much more from a technological perspective to begin trading. What fills in the gap for getting started is access to worthwhile investment educational materials.

The largest discount brokerages have the scale to provide beginners with useful educational and research resources for free. They also generally include tools such as retirement savings and minimum distribution calculators, stock and fund screeners, analyst reports and market commentary.

If you are concerned about the security of your brokerage account, open the account with a large, reputable firm. Also look into the brokerage’s cybersecurity and fraud-prevention controls before you open an account. User privacy controls should also be checked.

Even with your due diligence, remember that most online fraud is committed through social engineering—gaming individuals for personal information that allows “hackers” to assume your identity and accounts. If online privacy and security are huge concerns, pick a brokerage firm with brick-and-mortar offices.

Conclusion

Choosing a brokerage firm comes down to what your needs are as an investor. Full-service brokerages manage everything for you for a cost; discount brokerages give you a deal on fees and costs but leave the research and decision-making up to you.

Online brokerage accounts offer the most convenience, and large discount brokerages offer multitude resources for trading and education online. However, some brokerages still have traditional offices and financial professionals to assist you, potentially at an additional charge. Online discount competition has made opening a brokerage account cheap and easy, typically with no account minimums.

Consider that your first decision does not have to be your final decision. As your skills develop as an individual investor, you may find it advantageous to move your account elsewhere. Thus, try to make the best decision you can now, with the realization that you do have the option to change your mind in the future.