Choosing The Right Kind Of Broker

Gordon GekkoThe brokerage industry has changed greatly over the last decade. It is now possible to buy and sell practically any security online, yet people still insist on paying hundreds of dollars for a broker to do it for them. I’m not saying that managing your own investment portfolio is for everyone, but for the majority of investors, the possibility is very real and rewarding.

Today’s infographic makes it very easy for you to decide what kind of broker is for you: full service, discount or online.

Online

Personally, I love using an online firm as I’m the type of trader that does tons of research, performs daily chart analysis, constantly searches for news stories, etc. I know I’m responsible for my own portfolio and if I fail, it’s nobody’s fault but my own. To some, this may seem frightening, but at least you know you can trust your money manager (yourself) not to disappear with the majority of your net worth.

Today’s infographic makes it seem like you’re completely on your own, but that’s not entirely true. The majority of online brokerage firms will gladly assist you if you have questions or run into problems. There are however, some with no live support at all. Next week, I will focus on a variety of online firms and announce the ones I recommend.

Discount

The distinction between online and discount has become blurred over the last few years. Industry competition has forced online firms to offer support and even investment education while discount firms have lowered their commissions to compete with the online brokers. Full-service firms have even absorbed smaller companies to offer competing services.

For example, if you Google “discount brokers”, the top three search results are Scottrade, Fidelity and TD Ameritrade (you might even come across another E*Trade overseas when looking for share trading Australia). All three of these firms offer online trading as well a variety of other services such as in-office training and portfolio management combined with ultra low costs.

Full Service

The way I see it, full service brokerage firms are for three kinds of people – those who with not enough time to invest, others with enough money to pay someone else to do it for them and those that can’t pick a winning stock to save their life.

If you hold a full-time job that’s not in the financial sector, it can be very difficult to put in the time required to be a successful investor. Not many people want to come home and sit in front of a computer to conduct stock research when they’ve already been staring at a screen all day.

As much as I love trading and investing, if I was sitting on at least a few million dollars, I would gladly pay someone else to invest for me while I travel the world. Even if you plan on holding a security for a months and perhaps years, you need someone to keep an eye on your assets for you. There’s no Wi-Fi out at sea or in that remote town you love to visit in Italy.

Finally, individuals that have tried investing on their own only to loose money from the majority of their investments are better off hiring someone to do it for them. I feel really bad for the people that seem to consistently buy at the top and sell at the bottom no matter what kind of strategy their using. Sure, you’re going to pay around 1% of your total portfolio value if you pick a fee-based advisor, but a 1% fee coupled with an 8% gain is better than no management fee and a 10% loss.

READERS: What kind of broker do you use? Which do you prefer and why?

broker infographic

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About JW

Trader for 14 years. Series 7 & 63 licensed. Masters in Financial Management. Teacher of 100+ hours of financial education classes.

Comments

  1. Great infographic! I’m still torn about the type of broker I’d like to utilize to vamp up my investing efforts

  2. JW, another Awesome infographic! I did some trading back in 2007-09. I got some steals in early 09 with C, AAPL, GOOG and AIG. But also made some poor choices which I won’t mention here. I did a lot of reading, mainly Warren Buffet and Bogleheads, to get me started. I didn’t want to be an emotional investor but a smart one. I really enjoyed it for those couple years but in the end determined that it wasn’t my skill and I was better off and less stressed with my day job. I hope to one day get back into it.

    • That was a scary time to be in the market John. The financial and housing collapse scared away a lot of people. I’d say that 25% of the accounts I opened during that time frame are inactive now.

      Analysts are seeing a large number of hedge funds drop Apple and pick up AIG. It’s interesting to see AIG gain popularity again. What do you think about their swap?

      • I got some AAPL too that I’m holding on to. Should of maybe sold @ $700. I just recently sold some AIG. It tanked in 09 along with C and some others so it is pretty amazing how they’ve recovered. I also got some type of deal 2 years ago that said I could buy x amount of AIG stock for a predetermined price. I need to dig up that letter just in case I want to get some more in the future.

  3. I’m all about the online broker because I like to make decisions for myself. Plus, the cost is typically lower.

  4. I’m geeeeeking out over this infographic. You could put “Top Lindsay Lohan Hair-do’s” in an infographic and I would probably like it….BUT THIS ONE IS AWESOME.

    I love that if Ben Bernanke is your favorite economist and you don’t ‘have a job: “you need all the help you can get.” I’m also impressed my austrian school of economics is including. That means we’re moving on up!

    • I’m glad you enjoyed the infographic. There are thousands out there and I try to pick not only the most relevant, but the best designed as well.

  5. The online broker is the way to go, at least for me. I only feel comfortable when all the decisions are in my own hands. Many people feel less stressed when the burden is off their shoulders but I get the opposite effect. If I’m not in full control of my financial situation then I immediately feel uncomfortable.

    I can understand the thinking of wanting to put your portfolio in control of a full time professional if you are busy with other things but I still have some reservations. As the old saying goes, “where are the customers’ yachts?” There are good Full Service brokers out there but keep in mind that most of them are making their money off your transactions, so it’s in their best interest to get you in and out of as many positions as possible. This puts their short-term interests in a pretty serious conflict with your long-term financial health.

    • I’m right there with you Cody – I need to know exactly what my money is invested in at all times.

      It’s true that some advisors make money off of commissions. Those are the types I would completely avoid even if I didn’t manage my own money. Fee-based advisors on the other hand, usually have the investor’s best interests in mind because the more the account appreciates, the more they make when charging a base percentage. Transaction based brokers are legally bound to act in the interest of the firm and not the investor – that’s just crazy to me.

  6. Of course there is always the possibility that one may not need a broker, but I do like the info graphic. Very helpful.

    • What kind of alternatives are you thinking of CT? You could trade through the transfer agent or directly through the floor, but those are much more expensive than an online brokerage house.

  7. I have an online account. I don’t need advice and I don’t need to have the ability to do loads of research since I stick with low cost index investments. The most important thing to me is keeping trading costs as low as possible.

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