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How To Choose a Discount Broker
If you're a buy-and-hold investor who doesn't trade frequently and doesn't hyperventilate about whether your order is executed within 12 nanoseconds or 12 minutes, the broker you choose won't affect your blood pressure or the amount of money you end up with over your lifetime. Not to any serious degree anyway.
But maybe you're planning on being a very active trader, in which case the slight differences in costs and services between the competing brokerages will add up. Some discount brokerages are targeting their service toward a more active trader. Some are offering packages of services, including options trading, that a totally Foolish investor wouldn't be interested in.
What we Fools would consider the core service -- accounts with little or no annual fees, minimal fees per trade, satisfactory customer service -- will be more or less standard across the major discount brokerages. So, to state our position once again: If you're a Fool, it probably doesn't make much difference which discount broker you choose.
What You Should Look For
The following is a list of 10 factors to consider when selecting a discount broker. These factors are not presented in order of importance, as the importance will differ from reader to reader. (Unless two readers are identical clones. Aieeeee!)
1) Rates
Many of the advertisements that you'll see for discount brokers focus on the price per trade. While choosing the brokerage that provides the absolute lowest price per trade might be attractive -- and might even make sense -- it is likely that you'll find that there is some tradeoff between service and price. (You've probably discovered that once or twice before in your life.)
Online brokerages can be put into three general categories:
- Super-cheap brokers that charge from $4 to $12 per trade. Best used for those that plan on trading very frequently, but satisfactory for buy-and-hold investors as well.
- Mid-priced brokers that charge between $12 and $20 per trade. These brokers justify slightly higher prices with more well-known brand names, and possibly additional services.
- High-priced brokers that charge more than $20 per trade, typically around $29.95 per trade. (They think $30 trades sound too high, so they knock off a nickel -- but we're not fooled.)
2) Other fees
Beyond the price per trade, you'll find that brokerages may charge other fees, including fees for transferring assets into the account, fees for closing an account, IRA custodian fees, wire transfer fees, account inactivity fees, annual fees, and fees for not maintaining a minimum balance.
3) Minimum initial deposit
If you're just starting out as a new investor, you might not be rolling in dough. Fair enough. In this case, you'll want to focus on the account option that best serves your needs -- an account that has a minimum of $2000 for initial deposits or perhaps even less. If you don't have enough to meet account minimums, keep saving those pennies -- or look into a Drip.
IRA accounts will typically have lower minimums, and in some cases there is no minimum balance.
4) Customer service, site performance, and interface
Check out each brokerage's website and make sure the interface is intuitive and pleasing. This probably shouldn't be too difficult because it's entirely subjective, and by now all brokerages have had plenty of chances to test-market their sites on lab rats and occasionally human beings.
You also want to know what kind of customer service the brokerage has. In researching this you'll definitely want to see how the brokerage does at sending you all relevant material you ask for online.
Also, checking out The Motley Fool Discount Brokerage message board should give you invaluable insight as to the praise and complaints that are being made regarding each of the major brokerages. It's an active board, with many strong opinions. Understand that those with complaints are more likely to post their thoughts than satisfied customers.
5) Traditional banking services
It's possible now to do everything that you typically use a bank for through a brokerage account. Banking features available include:
Money market sweeps
Checkwriting and bill payment
Visa cards
Direct deposit
ATM cards
If you're using your bank in a way that has you going in to your local branch (say you're frequently depositing cold, hard cash into your account), it may not make sense for you to shift all of your banking to a brokerage account. Also, using broker-sponsored ATM cards at the local bank's machine may result in a pile of fees.
However the higher rates that your cash will typically attract in a brokerage money market account versus the typical savings or checking account could make up some of that difference. Also, if you meet certain minimum account levels, some brokerages will reimburse you for fees imposed by ATM machines. Check out our banking area for more details.
6) Research
There's plenty of research available for free all over the Web (including right here at Fool.com), but some brokerages have research that you may be particularly fond of. Some of the offerings include analyst reports, real-time quotes, and detailed financial data. These offerings are marketed as a real plus, but of course there's tons and tons and tons of data, tools, and free research all over the Internet. It is unlikely that any brokerage can offer you tools that significantly influence your choice.
7) Mutual funds
Once upon a time, the discount brokerages weren't offering mutual funds as an investment alternative -- but that is changing. The selection of mutual funds at brokerages can differ widely. Though we at The Motley Fool aren't big fans of managed mutual funds, your opinion certainly may run counter to ours. If so, and you have a particular mutual fund family that you're set on using, make sure that the brokerage you're selecting offers that family of funds.
No-load mutual funds can be purchased directly from mutual fund companies, so unless you're a mutual fund trading addict, the availability of thousands of mutual funds in one location probably shouldn't affect your choice either.
8) Investment product selection
Beyond equity mutual funds, there are a number of other investment vehicles that you may wish to use. All the brokerages will offer the stocks on the major exchanges. However, if you're somebody interested in risking your hard-earned moolah on over-the-counter (OTC) bulletin board stocks, you'll have to see which brokerages offer them. Other choices such as options, government bonds, corporate bonds, and the like are not available through every brokerage. Determine what you expect to need -- we're fans of just plain old stocks, especially if you're young -- and act accordingly.
9) Other methods of getting your investment choices executed
Sure, the Internet is an easy way to invest, but what about when you don't have access to a computer? Check out whether the brokerages you're looking at also have touchtone phone trading, and how that works. Sometimes you just might want to place an order through a real, live individual, and many discount brokerages offer that possibility, too.
10) Other freebies and perks
Beyond the low costs, some brokerages will give you frequent flier miles, books, months of Internet access, or just plain old money for you to open up an account. The reward for opening an account can go as high as $100, so keep that in mind. With the cutthroat competition going on these days, these offers are remaining pretty attractive. We wouldn't suggest making too big a deal about the freebies. After all, they are one-time things, and $100 probably isn't going to be worth the hassle if you soon find that you've made the wrong choice and have to move your account elsewhere. Still, free money is free money, and if you find yourself deadlocked on which brokerage to go with, cash (or some other perk) is a persuasive tiebreaker.
If you're only making five, six, ten, even twenty trades in a year, the difference between paying $7 per trade and $20 per trade isn't significant. Better to make customer service a priority, and not sweat about whether you've made the right choice.
After all, how much did you ever worry about which bank to open your first checking account with? The differences are about the same.
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See Also
Discount Broker Discussion Board
Personal Finance
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