Ultimate Guide to Brokerage Firms

Everything you need to know about selecting the right brokerage firm. Discover the features you need and the ones you can do without.

Picking the wrong brokerage firm could cost you, not just in fees but also in lost opportunities. Whether you’re an investing newbie or a seasoned trader, picking the right brokerages is critical to your investment plan. There are three main types of brokerage firms that you may come across.

Each one has various features, fees, strengths, and weaknesses to consider.

This guide will help you understand how different brokerages work and how to pick the right one for your situation.

The 3 types of brokerages

Depending on what your investment goals are, you have three general types of brokerages from which you can choose.

1. Discount brokers

Discount brokers are stockbrokers that charge reduced commissions on transactions. They operate on a self-service model that provides a powerful, yet automated, platform that is ideal for experienced investors who trade regularly. Unlike full-service brokers, they do not provide much in the way of advice or additional services. Their fees are cheaper because they either only execute orders for clients or charge additional fees for additional services, such as personal consultation, advice, research, or tax planning. Typically, discount brokers operate only online without brick-and-mortar branches, which also helps keep down overhead costs.

Discount brokerage firms are appealing to investors who frequently trade and want to keep their commissions low. Most trades are either free or cost just a few dollars. Some discount brokers also offer resources and tools to help investors make better decisions. However, they offer little in terms of hands-on assistance.

So, if you want to do your own trading and don’t want to be restricted by high fees, a discount broker is worth considering. But if you’d prefer someone else handle your investments, you might be better served elsewhere.

2. Full-service brokers

If you’re a high-wealth investor or you simply want someone else to manage your investments, a full-service broker may be a good choice. Full-service brokers are more expensive than discount brokers.

That’s mostly because they involve more hands-on assistance. The brokerage will assign an individual financial advisor to your account, who will then do your trading for you.

Full-service brokers also offer more specialized services. For example, you’ll get access to invest in initial public offerings (IPOs) and limited partnerships.

You may also get assistance with estate planning, which can be helpful if you’re coming up on your retirement years.

Since these brokerage firms are expensive, they tend to be best for investors with high net worths who don’t want to manage their own money. But if you’re a beginner investor with little to no investments yet, it’s best to steer clear.

3. Robo-advisors

Robo-advisors are relatively new to the financial services industry. They’re designed to help all types of investors manage their investments at a low cost.

The services are typically fully automated and hands-off. That means you’ll let the brokerage know what your asset allocation preference is — say, 90% stocks and 10% bonds. It will then do all the work for you, using algorithms.

Fees are very low compared with other brokerages and are typically charged quarterly or annually. Some robo-advisors, however, allow you to get access to a financial advisor for a higher fee.

The primary drawback to robo-advisors is that you can’t invest in individual stocks or even pick your own funds to invest in. While this may not be an issue for the “do-it-for-me” investors, it may not be worthwhile to traders who want more control over their investments.

But if you’re new to investing and don’t have the time or desire to figure it out yourself, a robo-advisor is a good fit.

How brokerages differ from financial advisors

A financial advisor can act as an individual broker for your investment needs, but they function a bit differently.

Financial advisors provide guidance on several financial matters, not just investments. They’ll put together a comprehensive financial plan encompassing your entire financial life. In return, they typically charge fees to manage your money.

Financial advisors are best for investors who have a significant amount to invest. Since their earnings are often based on how much money you have invested, it’s not worth it for many of them to invest with small-time clients.

“Using an online broker is generally far less expensive than using a financial advisor,” says Kalen Holliday, a director with Interactive Brokers.

“Also, with an online broker, you can place trades at your convenience. Financial Advisors don’t work around the clock and aren’t always available when you want to place trades.”

Keep in mind that anyone can call themselves a financial advisor. It’s important to choose one who has a certification that shows their experience and knowledge.

Certified financial planners, for instance, have completed rigorous education and testing requirements. They also have years of experience in the field.

Brokerage features to compare

Once you know what type of brokerage you want to work with, it’s important to know what features to consider when comparing them. Here are the main elements to consider.

Account offerings

The first question to ask yourself is what your goal is for investing. For instance, are you looking to save for retirement or education? Or do you just want to invest for the fun of it?

Different brokerages have different types of accounts. Most, for example, offer individual retirement accounts (IRAs) and taxable accounts that you can use for any type of investing.

But others may offer a limited scope of retirement accounts that don’t serve your needs. Knowing what type of investment account you want will make it easier to determine up front whether a brokerage is right for you.

Investment product selection

The next question you need to ask yourself is what you want to invest in. “Investors should consider whether the online broker they’re selecting offers the full range of investment products and services they want,” says Holliday.

Robo-advisors, for instance, don’t allow you to invest in individual stocks or exchange-traded funds (ETFs). As a result, they’re not good for investors who want to trade those.

If you’re a sophisticated investor, you may want to invest in options, futures, and other complex securities. That said, you may be limited with some discount brokerages. Full-service brokerages, on the other hand, may provide a better selection.

Fees

Each type of brokerage firm charges fees differently. So, it’s important to make apples-to-apples comparisons. Discount brokerages, for example, may charge you a commission every time you make a trade, plus annual expense ratios for mutual funds.

A full-service brokerage, on the other hand, may charge you a trading commission or a set percentage fee to manage your portfolio. Either way, you’ll pay more than with a discount broker.

Finally, robo-advisors often charge a set percentage annual fee based on your account balance. They may possibly charge secondary fees as well, depending on the funds in which your money is invested. Their fees are typically much cheaper than what you’d find with a full-service brokerage or a financial advisor.

Resources

Different brokerages have different resources available. For example, discount brokers vary wildly depending on their fee structure.

Brokerages that charge higher commissions tend to offer better educational resources. For example, you’ll see blog posts, webinars, and even free online courses. Brokerages that charge next to nothing, however, don’t offer much in this area.

Full-service brokerages typically don’t offer a ton of resources because your advisor is managing your money for you. You can, however, reach out to your advisor to ask questions about different investments and make suggestions.

“Online brokers often offer online financial planning tools, but they don’t provide the handholding that an advisor can,” says Holliday. These tools can help you track individual investments and see larger trends that could impact your investment decisions.

Like full-service brokerages, robo-advisors may not provide a lot of resources and tools. That’s simply because they’re doing all the legwork for you — well, at least their computers are. They may have a blog that offers general investment education. But since you don’t have a lot of control over your investments, there’s no need to provide tools to help you invest better.

How to compare brokerages based on 5 features

There are several different brokerages out there with different fee structures, resources, tools, and services. Depending on your investment goals and experience, one may be better for you than for your neighbor or best friend.

To help you understand how to compare brokerages, we’ll cover the main elements that you should keep in mind and how you should think about your situation before choosing one. Each brokerage firm offers different services and resources, and all of them charge fees of some kind. Here’s everything you need to watch out for as you’re comparing them.

1. Fees

Brokerage firms charge various fees to help you manage your investments.

Trade commissions are the primary fees you’ll run into, which you’ll pay every time you trade stocks, options, futures, and other financial securities. Trading commissions can range from $0 to $10, depending on the brokerage.

The other is an advisory fee, which you’ll pay to have the brokerage firm manage your money for you. You pay advisory fees on a quarterly, semi-annual, or annual basis and it’s typically a percentage of your investment balance.

Advisory fees are typically between 0.25% and 1.5%, and they often decrease as your account balance increases.

2. Selection

There’s more to just stocks and mutual funds in the investment world. In fact, depending on the brokerage firm you choose, you could have access to trade one or more of the following:

  • Stocks: Represents a share of ownership in a U.S.-based company.
  • Bonds: A loan to a company or government agency that typically offers fixed income.
  • Options: A derivative security that gives you the right, but not the obligation, to buy or sell an underlying asset at a set price on or before a set date.
  • Mutual funds: A collection of stocks, bonds, or other securities funded by a pool of investors to help diversify their holdings. They typically don’t trade like stocks.
  • Exchange-traded mutual funds: Mutual funds that you can buy and sell on a U.S. exchange like a stock.
  • American depository receipts (ADRs): Represents a foreign stock on a U.S. exchange.
  • Futures: A financial contract that requires the buyer to purchase an asset or the seller to sell an asset at a set price on a future date.
  • Forex: The market where you can trade foreign currencies.

Also, the types of accounts a brokerage offers may be just as important. For example, if you want to save for retirement, you won’t want to work with a brokerage that doesn’t offer retirement accounts.

The same goes for education accounts. Most brokerages, however, offer a traditional taxable account.

3. Educational resources offered by brokerages

Making money through investing can be complex, especially if you branch out beyond mutual funds. Some of the best brokerage firms offer various educational resources, including:

  • Online courses
  • Articles
  • Videos
  • Webcasts
  • In-person events
  • One-on-one advisory

If you’ve been investing for a long time, these resources may not be important to you. But for newbie investors, they could be essential.

4. Tools and platforms you should expect from a brokerage

Even sophisticated investors understand how important it is to have the right tools to make good investing decisions. While some brokerages don’t offer a lot of tools, others provide them in spades.

As you figure out how to compare brokerages, look for ones that offer features such as:

  • Third-party research
  • Calculators
  • Up-to-date financial news
  • Social signals
  • Fundamental and technical analyses

Also, check to see if the brokerage offers a mobile app that allows you to trade on the go.

5. Advisory services

If you don’t care to manage your investments, working with a brokerage that offers advisory services is crucial. Robo-advisors do this by using algorithms rather than human advisors, while other brokerage firms may have a person manage your portfolios.

Of course, human managers tend to cost more than robo-advisors, so it’s important to know what your preference is.

How to pick the right brokerage

For Barry Moore, an IFTA certified market analyst at Liberated Stock Trader, the right brokerage depends on the type of investor you are.

Independent investor

If you’re an independent investor, you’re investing for the long term and likely aren’t trading very frequently.

For an independent investor, the online broker fee for a trade is not so critical because you will be making trades less frequently and holding for long periods”

You’re not interested in the short-term ups and downs of the market because you won’t be using the money until years down the road. Think retirement or other long-term financial goals.

“For an independent investor, the online broker fee for a trade is not so critical because you will be making trades less frequently and holding for long periods,” says Moore.

He adds, “What will be important is managing your holding in an optimized and tax beneficial way.  You will also be looking for retirement planning tools and good quality research.”

You will probably be making many trades per day and need fast execution to ensure you get the right buy and sell prices”

Independent traders

If this describes you, you’re frequently trading stocks and other securities for short-term profits. You’ve got eyes on the latest news and your finger on the trigger, so to speak.

“You will probably be making many trades per day and need fast execution to ensure you get the right buy and sell prices,” says Moore. “And because of the higher trading volume, the commissions matter.”

So, for you, working with a brokerage that charges low commissions is critical.

You can pay premium brokers to provide advice, or you can go with a cheaper option of robo-advisors”

Hands-off investors

If you’re not sure you trust yourself to handle your investments or you’re just not interested, you may want to sign up for a brokerage that offers advisory services.

“You can pay premium brokers to provide advice, or you can go with a cheaper option of robo-advisors,” says Moore. The advisory fees will eat into your profits, so it’s important to pick one that offers a good balance between cost and the service it provides.

How to pick the right brokerage

“Each online broker has special features and you should look for one that best matches your needs,” says Holliday. This means that there’s no single best brokerage firm out there for everyone.

For instance, a robo-advisor may be best if you’re a new investor and are afraid to do it on your own. But if you want to learn or you like the idea of investing in individual stocks on the cheap, consider discount brokers instead.

Once you pick which type of brokerage firm you want, review the various features to choose the best one for your needs. Specifically, look at account offerings, product selection, fees, and resources.

To help you compare, use SuperMoney’s brokerage review page to view each of these features from several brokerages all in one place.

Finding the right type of brokerage and picking an individual firm will help you achieve your investment goals. What’s more, it will help you invest the way you want to.