How Do You Decide Where To Open An Investment Account?

February 22, 2019

When it comes to investing, once you’ve decided how to divide your money between types of investments, which investments to pick, and what type of account to contribute to first (401k or IRA, pre-tax or Roth) there’s another decision you’ll need to make: where should you actually open the account?

If you’re just contributing to your employer’s retirement plan, there’s not much of a choice. On the other hand, if your tax accountant just told you to open your first IRA, leaving the comfort and safety of your workplace benefits can be intimidating. Alternatively, you may already have outside accounts but feel unsatisfied with your current broker/mutual fund company and are looking to make a switch.

A range of options

When I started my financial career, it was pretty simple. There were full-service brokers that also charged full commissions and there were no-load mutual funds and discount brokerages that offered little or no help to investors. Now, there are a range of options in between that can give you some of the best of both worlds. Here are some questions to consider:

Are you looking for investment advice?

If so, your choice of advisor may dictate where you invest. There are generally 3 ways you can go for advice. I’ve worked in all three environments so I can tell you that they each have their pros and cons.

1. Traditional full-service broker. One option is to use a traditional full-service broker that charges a commission for investments that you purchase through them. For example, a full-service broker may charge a “load” for mutual funds, which can sometimes be as high as 5.75%. Be aware that for some investments, such as annuities and class B and C mutual funds, those commissions can be hidden as part of another fee.

For bonds, the commission can take the form of a reduced yield. In addition to many of the big names like Merrill Lynch and Smith Barney, many banks, credit unions, and insurance companies offer investments this way.

Advantage: You only pay for the advice you take and it can be cheaper in the long run than paying a percentage of your overall account every year.

Disadvantage: These “advisors” may be tempted to sell you products that make them money rather than you. If you go to a financial advisor and he/she tries to convince you to invest in insurance products right off the bat, you may want to keep shopping – there is a place for those investments, but that’s often a red flag that the advisor is looking to make the most money for themselves rather than help you grow yours.

2. Independent registered investment adviser (RIA). They generally charge you an annual fee, usually around 1% of the assets they manage for you, or in some cases an annual retainer or hourly rate. Your investments are usually held at a separate discount brokerage firm like Charles Schwab, Fidelity, or TD Ameritrade, or at an independent brokerage that you’ve probably never heard of. This separation can help prevent Bernie Madoff-type fraud, but it also means that you may have to go to one place for advice and another for administrative issues.

Advantage: You can get more objective advice and often more comprehensive financial planning.

Disadvantage: Fees can be higher in the long run and many RIAs won’t even accept clients with accounts smaller than $250k, or often $500k or more.

3. Discount brokerage. Several discount brokers like Schwab, Fidelity, and Vanguard have also started offering advice at a lower cost. The depth of the advice depends on how large your account is, but their starting threshold is generally lower than an RIA, and they tend to charge less as well. You might also be able to get some free fund recommendations if you’re willing to forgo ongoing management and simply rebalance your portfolio periodically.

Advantage: Lower balance required and lower fees.

Disadvantage: You most likely won’t ever meet face-to-face with your advisor and their advice will be limited strictly to your investments, which may not take into account your personal goals for the money.

What do you want to invest in?

If you can’t answer that question, you may want to revisit the previous one. If you do know what you want, this is the question to start with. After all, some companies may not even offer the particular type of investment you’re looking for, and some places may charge more for it than others. For example, it’s generally cheapest to buy Vanguard and Fidelity funds directly from the source. Your choice of investment should determine your provider, not the other way around.

How do you invest?

How you’ll invest matters too. If you’re actively trading stocks every day, you might want to look for in-depth research, trading tools, and quality execution, along with low fees for trading. On the other hand, those factors won’t be as important if you’re just buying a few mutual funds to hold, where you should be more focused on ongoing fund fees.

What are the fees?

Either way, costs are an important consideration because they can really eat into your returns over time. Fortunately, competition has driven commissions on stocks down to as low as $2.50 a trade at Just2trade, and many brokerage firms offer a variety of mutual funds without any loads or transaction fees (NTF or non-transaction fee funds) so see if any of them offer the funds you want for free.

If you’re transferring from another company, the previous company may charge you a hefty fee on the way out, but some companies will rebate those fees, up to certain amounts, back to you if you transfer your account to them. Finally, look out for maintenance fees, especially on IRAs.

How convenient is it?

Once you’ve narrowed your search, see how close the brokerage firms’ branch offices are to you or if they even have one (many only do business over the phone or Internet). Some brokerage companies also provide FDIC-insured banking services. In addition to allowing you to have everything in one place, these accounts can pay more than traditional bank accounts and may even rebate your fees for using another bank’s ATM.

Your choice of brokerage companies probably isn’t something you want to decide based on which office you happened to walk by or which television ad you remember. It will affect how much and what type of advice you get, what investment options are available to you, how much you pay in fees, and your overall investing experience. There is no one best choice for everyone, but some will certainly make it easier for you to achieve your goals than others.