Broker Benefits: Should You Use One For Investing?

Deciding whether to use a broker for investing depends on several factors, including your investment goals, financial circumstances, and risk tolerance. While you don't need a human stockbroker to purchase stocks, you will need to work with a brokerage firm. Some brokerages provide strategic investment advice and carry out trades on your behalf, while others offer an automated robo-advisor platform.

Full-service brokerages can buy and sell stocks, provide investment advice, and manage your portfolio, but you'll likely pay a premium. Online investment brokerages, on the other hand, allow you to trade stocks yourself and are more cost-effective. Robo-advisors are fully automated platforms that create a portfolio for you based on your investment goals, age, and risk tolerance.

When choosing between a broker and a DIY approach, consider your level of investment knowledge, your ability to evaluate companies, and your understanding of your time horizon and risk appetite. If you're a beginner investor, the right broker can function as a teacher, advisor, and investment analyst, helping you build a solid foundation as your skills and portfolio grow.

Full-service vs online brokerages

When choosing between a full-service and an online brokerage, there are several factors to consider. Both full-service and online brokerages allow you to buy and sell stocks, bonds, mutual funds, exchange-traded funds, and other investment products. However, there are some key differences to note.

Full-service brokerages offer investment expertise, advice, and services in exchange for commissions and fees. They also provide administrative functions such as executing trades, arranging settlements, and handling confirmations, statements, dividends, and tax data. Additionally, full-service brokers often offer personal financial planning, insurance, estate planning, retirement planning, and other services. The cost of full-service brokerages is typically higher, with fees ranging from 1% to 2% of assets managed per year, plus potential commission fees for each security bought or sold.

On the other hand, online brokerages, also known as discount brokers, offer a self-service option for investors. They usually have lower commissions and trading fees, and provide easy-to-use online trading platforms. Many online brokerages also offer educational tools and resources to guide investment decisions. Online brokerages are often more affordable, especially for beginners or investors with limited funds.

The choice between a full-service and an online brokerage depends on your individual needs and preferences. If you seek personalized advice, guidance, and additional services, a full-service brokerage may be preferable. However, if you are comfortable making investment decisions independently and prefer lower costs, an online brokerage might be a better option.

It is important to evaluate your investment goals, risk tolerance, and the level of service and guidance you require before making a decision. Additionally, consider the qualifications and expertise of the broker and whether they hold relevant certifications, such as Certified Financial Planner (CFP) or Chartered Financial Analyst (CFA) designations.

Robo-advisors

Some robo-advisors also offer additional features such as access to human financial advisors, cash management tools, and high-yield savings accounts.

Wealthfront

Wealthfront is considered the best overall robo-advisor due to its low fees, customisation options, and additional features. It offers automated investment portfolios, individual stock investing, high-yield cash accounts, and lending capabilities. Wealthfront also has an impressive digital financial planner called Path, which can answer up to 10,000 queries and help with retirement and college planning. The minimum investment amount is $500, and the annual fee is 0.25% for most accounts.

Betterment

Betterment is a good option for beginners as it has a low minimum investment amount of $10 and multiple portfolio choices. It also offers crypto investing and cash management tools, including a high-yield cash reserve and checking account. The annual fee is 0.25% for accounts with at least $20,000, and there is no minimum balance requirement.

SoFi Automated Investing

SoFi Automated Investing is a good choice for those looking for low fees, as it charges no annual advisory fee and has a minimum investment amount of just $1. It offers diversified portfolios of ETFs and access to financial advisors.

M1 Finance

M1 Finance is a unique robo-advisor that allows users to choose their own stocks and ETFs in addition to offering pre-built portfolios. It is a good option for sophisticated investors who want more discretion in their portfolio selection. The minimum investment amount is $100, and there is a $3 monthly platform fee for accounts with less than $10,000.

Acorns

Acorns is a micro-saving app that is ideal for those who struggle to save. It has a "round-up" feature that automatically invests your spare change when you spend from a linked debit or credit card. The monthly fee ranges from $3 to $12, depending on the account type, and there is no minimum investment amount.

Ellevest

Ellevest is a robo-advisor designed specifically for women investors, offering investment portfolios that address the specific financial needs of women. It provides tailored portfolios, low-cost subscription pricing, and discounted access to financial advisors. There is no minimum investment amount for the digital plan, which costs $12 per month.

E*TRADE Core Portfolios

E*TRADE Core Portfolios is a solid robo-advisor platform with a user-friendly mobile app. It offers multiple investment strategies, including core, ESG, and smart beta. The minimum investment amount is $500.

Merrill Guided Investing

Merrill Guided Investing is a good option for those seeking education and comprehensive financial tools. It offers a wide range of educational resources, such as webinars, courses, and calculators. The minimum investment amount is $1,000, and the annual fee is 0.45% of assets under management.

Broker fees

Brokerage fees are the charges levied by brokers for their services. These fees can be charged as a flat fee, a percentage of the transaction, or a combination of both. The fees vary depending on the industry and the type of broker involved. Brokerage fees are common in banking, investing, insurance, delivery services, and real estate.

• Annual Fees: These are charges that investors incur on a yearly basis for maintaining their brokerage accounts. Annual fees cover administrative costs associated with account maintenance, access to trading platforms, and customer support services.
• Research Fees: Some brokerage firms offer research and analysis tools, and may charge fees for access to premium research reports, investment data, and market analysis.
• Inactivity Fees: These fees are levied if investors do not execute trades or maintain a minimum level of activity within their accounts over a specified period. Inactivity fees are designed to incentivize regular trading activity and cover the costs of maintaining inactive accounts.
• Fund Fees: Investors who invest in mutual funds or ETFs may incur fund fees, which cover expenses associated with managing and operating these investment funds, including management fees, administrative expenses, and other operational costs.
• Account Fees: These fees cover administrative and service-related expenses associated with maintaining a brokerage account, such as charges for account opening, closing, or transferring funds.
• Assets Under Management (AUM) Fees: Some brokerage firms or investment advisors charge fees based on the total value of assets under their management, typically calculated as a percentage of the investor's total assets.

The calculation of brokerage fees depends on several factors, including the type of asset being traded, the size of the trade, and the brokerage firm's fee structure. Some firms offer volume-based discounts, with lower commission rates for higher-volume traders.

Online brokerage platforms often offer $0 fees for listed stocks and ETFs. However, they may charge fees for access to more complex instruments or exotic assets. Robo-advisors, which use algorithms to provide automated financial planning and investment management, typically charge lower fees than traditional brokers.

It is important to carefully consider the fees charged by brokers, as they can significantly impact your overall investment returns. Even small fees can add up over time and reduce your portfolio's returns. When choosing a broker, it is crucial to assess the services provided and whether the cost of those services is justified.

Brokerage accounts

A brokerage account is a necessity if you want to buy stocks. Brokerage firms act as a bridge between you and the stock market, allowing you to trade stocks, bonds, and other securities. You can choose between a full-service brokerage, an online investment brokerage, or a robo-advisor.

Full-service brokerages can buy and sell stocks on your behalf, provide personalized investment advice, and manage your investment portfolio. They will also set up your asset allocation and rebalance when necessary, but you will likely pay a premium for this service.

Online investment brokerages are a more cost-effective option, where you can trade stocks yourself using a brokerage account. This is a good choice for seasoned investors who prefer to be in control.

Robo-advisors are fully automated online investment platforms. After assessing your investment goals, age, and risk tolerance, they will create a portfolio for you and buy and sell stocks on your behalf. This is usually the cheapest option.

When choosing a brokerage account, you will also need to decide between a cash brokerage account and a margin account. A cash brokerage account is linked to another bank account, allowing you to transfer funds whenever you want to purchase stocks or other securities. With a margin account, you borrow money from the brokerage, using your portfolio assets as collateral.

It is important to note that you do not need a broker to buy stocks, but you will need to work with a brokerage firm. Some online brokerages charge no fee for buying and selling stocks, but there may be fees for options contracts and futures.

Choosing a Brokerage

When deciding which brokerage is right for you, consider what you are looking for. If you are an experienced investor, you may just want access to the market through an online brokerage. Others may prefer a stockbroker or robo-advisor to handle the details for them.

It is worth comparing brokerages and their offerings, as fees, technology, educational resources, and customer service can vary. You should also ask if uninvested cash in your brokerage account will be swept into an external account that earns interest.

Investment Alternatives

While stocks are considered high-risk, you can also invest in bonds, which are lower risk. When you purchase a bond, you are lending money to the issuer, which could be a corporation, municipality, or the government. They are obligated to repay the bond with interest, but bond returns typically lag behind stocks. Holding a mix of both can help you balance your portfolio.

Another alternative is to invest in mutual funds and exchange-traded funds (ETFs), which allow you to hold a basket of different stocks and other securities. ETFs trade like stocks and may track a market index. Mutual funds have a fund manager and typically charge higher fees. You can invest in both through a brokerage and they can help to diversify your portfolio.

Summary

A brokerage account is necessary if you want to invest in stocks, and you have several options to choose from depending on your level of experience and how involved you want to be in the process. You can also use a brokerage account to invest in other securities, such as bonds, mutual funds, and ETFs.

Investment alternatives

There are several alternatives to using a broker for investing. These include:

• Peer-to-peer lending: P2P lending is a relatively new phenomenon where online services offer loans for businesses or personal use. If you join the pool of investors, you can loan money to qualified borrowers and receive fixed repayments with interest. Returns from P2P lending can often be higher than those from standard savings vehicles. However, the main risk is that borrowers may default on their loans.
• Real estate: You can invest in real estate by buying and owning property, such as a house, duplex, or apartment complex. This option comes with the responsibility of being a landlord, but you can also hire a property management company to handle tenant-related issues and repairs. Alternatively, you can form a partnership with other investors to spread the risks and responsibilities.
• Gold: Gold is considered a tangible inflation hedge, a liquid asset, and a long-term store of value. It is often sought after as a diversifier due to its low correlation with other asset classes. Investors can gain exposure to gold through physical holdings, gold exchange-traded funds (ETFs), gold accounts, or indirect investments in gold mining stocks or futures and options.
• Owning your own business: Investing in your own business can potentially produce high returns but also carries the risk of failure. Some businesses, such as virtual or online ventures, have low startup and ongoing costs. You can also consider starting a part-time business alongside your regular job to generate extra income.
• Equity crowdfunding: You can own a part of a startup company by investing through equity crowdfunding websites like AngelList, CircleUp, SeedInvest, and Wefunder. This option offers the potential for rewards if the company succeeds, but you may also lose your investment if the company fails.

It is important to diversify your investment portfolio and consider your risk tolerance when exploring these alternatives. Remember that investing carries inherent risks, and it is always advisable to consult with a financial advisor before making any investment decisions.

Frequently asked questions