How to Pick a Brokerage When You're New to Investing

As an investing newbie, there’s a lot to take in.

Not only is there a long list of securities you can invest in, but there are also several brokerages that can help you do it.

While these companies are great at marketing, it’s rarely a good idea to go with the first offer you see.

Instead:

It’s important to know what type of brokerages are out there, as well as what your investment goals are and how you want to achieve them.

Types of Brokerage Firms

There are three types of brokerages that can help you invest your money.

The right one for you will depend on the type of service you need and how much control you want over your account.

1. Full-Service Brokers

As the name suggests, full-service brokers offer investors more hands-on assistance.

This typically includes having an advisor assigned to you personally. The advisor will manage your funds for you with your input.

Some full-service brokers offer access to more specialized services, such as investing in IPOs.

You may even get help with your estate planning, which can help down the road when you’re nearing retirement.

For all these services, though, you’ll typically pay a high price.

Full-service brokers tend to be the most expensive of the three types of brokerages.

They’re best for high-wealth investors who can afford to pay high fees to have someone else manage their money.

Some full-service brokerages include:

  • Edward Jones
  • Merrill Lynch
  • Morgan Stanley

The big national banks also provide full-fledged brokerage and investment services.

2. Discount Brokers

Discount brokerage firms typically have a self-service model.

They typically charge much lower fees than what full-service brokers charge.

They don’t provide much in the way of personalized investment advice.

But, discount brokers often have a suite of resources, including tools, courses, and written content to help you make better investment decisions.

Discount brokers typically don’t charge an annual fee.

Instead, they charge a commission every time you trade, typically between $5 and $10.

Some firms, including Robinhood, don’t charge a commission at all, making money off of deposit balances and premium features.

Discount brokerage firms are a great option for beginner and experienced investors alike.

That’s especially the case if you plan on trading regularly.

They do, however, require that you do most of the legwork in managing your investments, which can be daunting if you have no experience.

Other discount brokers include:

3. Robo-Advisors

Robo-advisors are a relatively new type of brokerage, and they’re powered by technology instead of human managers.

With a robo-advisor, you typically let it know your investment goals and risk tolerance. Then it invests your money accordingly.

The only aspect of your investments that you get to control is your asset allocation.

For example, you can say you want 85% invested in stocks and 10% in bonds. The robo-advisor’s algorithms do the rest.

Robo-advisor fees are low, even compared with discount brokers.

This is primarily because they don’t have as much overhead, and many of them operate online only. You’re typically charged an annual fee as a small percentage of your balance.

The biggest drawback:

You can’t pick the funds you invest in.

You can’t even invest in individual stocks as you can with discount and full-service brokerages.

While that might not be an issue if you don’t want to manage your own money, it can be a deal-breaker if you want at least some autonomy.

Top robo-advisors include:

Features to Consider When Picking a Brokerage

With three different types of brokers available and several firms within each category, finding the best one for you requires a little research.

Specifically, here are five things to think about.

1. Account options

The first question to ask yourself is what you’re planning on using your investment money for.

If you’re saving for retirement, for example, you may find that not all brokerages you find will offer individual retirement accounts — specifically some discount brokers.

If you want a basic taxable investment account, however, just about any brokerage can provide that for you.

2. Advisory services

Even if you plan to go it alone, it might be nice to have the option to get professional help if you need it.

Full-service brokers offer the best advisory service because an advisor is assigned to you personally.

Some discount brokerages and robo-advisors, however, offer these types of services for a higher fee.

So if you want the option, consider opening an account with a broker that offers it.

3. Selection

If you want to learn about several types of securities and assets, you likely won’t learn much with robo-advisors, which typically use exchange-traded funds exclusively.

Some discount brokers offer a wider selection of securities and assets that you can invest in, but others are limited to a few.

Full-service brokerages, on the other hand, typically offer everything under the sun.

4. Fees

How much you pay a brokerage is key because those fees eat into your total investment return.

And since different types of brokerages have varying approaches to fees, it’s important to make comparisons in the right context.

For example, robo-advisors typically charge a low annual fee, while discount brokerages charge commissions every time you make a trade.

Full-service brokerages, on the other hand, may charge you a commission plus a percentage of your portfolio for ongoing management.

As you look at different brokers, consider how much you’re willing to pay for the services they offer.

5. Minimum deposit

If you don’t have a lot of money to put into an investment account, you may have a hard time opening an account with some brokerages.

That’s because some brokers have a minimum opening deposit.

Depending on the broker, it can be anywhere between a few hundred dollars and a few thousand.

Robo-advisors and some discount brokers typically don’t have a minimum investment requirement, though, making it easier to get your start there.

6. Resources

As a newbie investor, there’s a lot to information to absorb.

Unfortunately:

Some brokers don’t provide many resources and tools to help you become a better investor.

Some, for instance, have a blog and maybe a few long guides. But others offer several resources, including:

  • Online courses
  • Third-party research
  • Calculators
  • Analyses
  • Social signals

You may also find brokers that offer complex tools that can give you real-time advice as you make trades.

Of course, the more a broker offers, the more likely that it charges higher fees. So it’s important to weigh those two together before you make a decision.

How to Pick the Right Broker For You

In addition to evaluating different brokerages based on their features, it’s also important to evaluate yourself to understand what your needs are.

Goals

For starters, consider what your investment goals are.

If you’re focusing on retirement, for instance, you’ll want a broker that offers retirement accounts with good features.

Your investments

Next, think about how often you plan to trade.

Again, if it’s a retirement account, probably not frequently.

But if you’re buying and selling stocks, you’ll likely want to work with a brokerage that charges low commissions on your trades.

Management style

Finally, it’s important to think about how much control you want over your investments.

The idea of having a robo-advisor doing all the work for you sounds appealing. But it may not be enough if you want to learn more about investing in the future.

At the same time, paying a full-service broker to manage your money for you may be too costly.

As you shop around for a brokerage, take the time to review what each one does for you and what you have to do for yourself.

Look:

There’s no right or wrong answer, so pick the one that best fits your needs.

Before You Start Investing

The idea of earning a lot of money through passive income is exciting, but investing the right way isn’t always that way.

As a beginner investor, it’s important to set your priorities before you open an investment account.

Saving for retirement, while not as sexy, may provide you with more long-term value than day trading.

It’s also essential that you ensure that the rest of your finances are in good shape.

Saving up for a proper emergency fund — typically three to six months’ worth of basic expenses — and paying down high-interest debt will make it easier to invest now and in the future.

And if you’re considering investing in individual stocks, consider using mutual funds and exchange-traded funds first until you have some more experience under your belt.

As you learn more about risk versus reward and diversification, it’ll improve your chances of being successful with individual securities later on.

Finally, it’s important to be clear about when you’re planning to use the money you want to invest. If you need the money in the near future, for example, it’s best kept in a savings account.

That way, your principal balance is safe until you need it.

The longer your time horizon, though, you can afford to take on more risk.

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