Finding the right broker for you is just as important as choosing the right bank. You’ve got to consider what kinds of products and services you need in order to be successful. Choosing a financial institution to help grow your retirement nest egg isn’t always an easy task. There are several common traps that the uninformed investor can easily fall into. Read this article for expert advice on how to choose a broker that is right for you.
One of the biggest mistakes you can make when looking for a brokerage is choosing the first one you find. In today’s world, there are so many choices that it can be quite overwhelming. While it can be overwhelming, it has created a great opportunity for individual investors. As competition continues to heat up, commissions and fees are going to continue to decline. When it comes to choosing a broker, there is no reason that you should settle.
The best place to start your search is with an expert that you already trust. Most advisers have a license to sell, but I always recommend keeping your advisor separate from your brokerage so that there is never a conflict of interest in the advice you receive. Choose a fee-only advisor if you don’t already have one. Doing so will be vital to your success.
Brokers offer countless services for their clients. Before you sign-up with one, you need to recognize that not all services are standard or free. Some brokerages will give you research, but only if you meet a minimum activity threshold or have an account balance of a certain size. When you're looking at what you need, think about how often you trade, if you need to be able to withdraw money quickly, and if you really do need a mobile app.
Here’s a great rule of thumb when it comes to commissions: the greater the commissions, the more support you get, and the fewer restrictions you are subject to. The larger brokerage houses like TD Ameritrade and Charles Schwab offer commissions of $9.95 and $8.95 respectively. Other brokerages like Interactive Brokers or Trade Station offer rates as low as $.005 per share.
There is a catch to these kinds of brokers, however, and chances are they aren’t going to be a good fit for you. When you see rates quoted on a per-share basis, it’s a sign that the brokerage is catering to traders and professionals who move huge sums of money multiple times a week. These kinds of brokers are no place for passive or non-active investors.
Another great way to narrow your search is to consider what kinds of securities you're going to be buying and how often. If you plan on only investing long term and/or trading less than a couple times a month, a brokerage like Folio might be all you need. If you're only going to be trading options, Trade Monster or Optionsxpress might be a better fit for you. If you are looking for index funds, Vanguard is your best choice. For mutual fund investors, it’s almost always cheaper to purchase shares directly from the mutual fund then through a third party broker. The list could go on and on, but the point is there is a brokerage out there that is designed to fit the kinds of investments you’ll be making.
One of the most common marketing techniques used by brokerages is to advertise their trading platform and all the wonderful features it has. They advertise beautiful screenshots of graphs and market data that makes investing look like a fun game just waiting for you to play. But when it comes to choosing a brokerage, unless you're going to be a very active trader, the platform and features shouldn’t be important to you.
A mentor of mine give me a piece of advice when I started actively trading the markets that has stuck with me for years; “The platform doesn’t make you money.” As shiny and sparkly as the software appears to be, it will never make you money. Don’t get sucked into all the features of a platform you're never really going to use (unless you plan on spending a couple of weeks learning how to use it).
This is another common marketing technique both brokers and banks like to use to entice new clients. Your broker decision should not be based on getting some sort of cash back as a result of depositing a minimum amount into your new account. The broker you choose is in charge of protecting your hard earned money for a very long period of time. Remember that you're going to have to be working with the brokerage for years, if not decades. Don’t get sucked into a short term deal only to suffer down the road because you chose the wrong broker.
Every time you move your account, you're going to incur a transfer fee. The more you move and the faster you move, the more fees you're going to be subjected to. Many brokers have minimum deposit periods to discourage the constant opening and closing of accounts. They’ll make it easy to open an account and difficult to close one.
The days of calling up your broker and asking what’s hot is over. Now brokerages are really nothing more than a custodian who holds your funds and executes trades at your direction. If you need advice, seek out a fee-only adviser who is not incentivized by commissions or kickbacks from mutual fund companies. If you're looking for a truly unbiased opinion that is in your best interest, a brokerage isn’t a great place to look.
Choosing a brokerage is a very personal decision that should never be taken lightly. Friends and family have their own financial goals and dreams that often differ from yours. No one invests the exact same way, which is why there are so many varieties of brokerages out there.
Take your time when it comes to choosing a broker. This is the company that you are going to be entrusting your hard earned money with for a very long time. You want your nest egg to grow and provide for your retirement. Not slowly shrivel away because you're getting sucked by excessive fees or paying for services that you don’t actually need. There is a broker that is right for you. It’s up to you to find that perfect match.
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