So, you finally are making some good money. You know, the type of money that allows for you to: save, spend, and invest. Maybe even travel on your terms.
Regardless of where you are in life, everyone needs to know how to pick the best broker for them. There are many options out there and it is important that you choose the right fit. What works for someone else may not work for you, and what works for you may not be good for others. You really need to understand what your needs are and make a choice from there. You can do this on your own or you can hire someone to help you choose.
No matter how you do it, knowing what each type of brokerage has to offer is very important before making a commitment to one over the other.
The Difference Between a Non Discretionary Account vs. Discretionary Account
First of all, you need to know the difference between a non-discretionary account and discretionary account.
A discretionary account is one in which an investment advisor has the power to make individual transactions without the need for client approval. A non-discretionary account is one in which the client has absolute control over whether or not to execute a trade.
Why does this matter?
Well, if you are not an experienced investor it really doesn’t matter. What matters is what you want out of your account and how involved you would like to be.
How much control do I need over transactions?
If your investment knowledge is very limited then you should probably go with a non-discretionary account. If this will be your first time investing and you feel like you will need a lot of help along the way, then this is probably the best option for you. The reason for this is that once you give discretion to an account owner they can make trades without consulting with you first. It may take days or weeks for them to pick up on what your goals are and your tolerance for risk. You may not like the recommendations they make and be forced to choose between accepting their advice or pulling out of your account all together.
However, if you are a more experienced investor and do not need help along the way, then it probably makes more sense to sign up with a discretionary account owner. This means your account owner will have the ability to make trades without consulting with you first. They will likely be a lot more aggressive and active because they know that they can get away with it. It is important for you to at least have some knowledge of what these transactions are so that you have an idea of how your portfolio may look in the future if you do not stop this from happening.
Full-Service Brokers vs. Discount Brokers
Next, you need to know the difference between full-service brokers and discount brokers.
Discount brokers are exactly what they sound like: cheaper than a full-service broker. Brokers who work at discount firms do not offer investment advice and this allows them to keep their prices lower. Most of these types of brokerage houses offer a vast array of investment options and research at a fraction of what full-service brokers would charge.
Full-service brokers, on the other hand, offer just that: full service. This means that they have licensed professionals working for them who can provide investment advice. These advisors will be able to tell you everything from what type of stocks to invest in, to why you should or shouldn’t be invested in them. You will get a lot of hands on treatment and their goal is to always put the client first.
Check Your Broker’s History for Suspicious Behaviors
So, you finally found the right guy (or gal) to help you invest, but how can you be sure they are not making trades behind your back? Unfortunately, it is not always clear cut.
The first thing you should do is check their history for any suspicious behaviors. You can find this information by checking out BrokerCheck on the FINRA website. It will show all of the complaints made against the brokerage firm in the last ten years.
You will need either your full broker’s name or the broker’s CRD Number (which should be printed on their business card) to find their records. Finger’s crossed that you don’t find anything. But, if you do: take note of any complaints filed and the resolution.
While many of these complaints are not indicative of any wrongdoing, this type of claims are usually there for good reason. Trust me, it’s much better to be safe than sorry later down the road.
Fee Structures, Pricing, and How Broker’s Make Their Money
Once you have found a broker who seems to be on the up and up, it is time to find out about their pricing structure. Brokerage firms are different in this respect as well because there is no standard fee structure.
This means that some brokers will charge more for certain types of transactions than others do. You need to know what you are looking at before you start any trading activity.
As I mentioned above, there is no standard fee structure which creates a lot of confusion. One common set-up is the flat fee schedule in which you pay a flat fee for either buying or selling shares. For instance, if your broker charges $10 to sell and $15 to purchase, you will pay $25 every time you make a transaction. It is always better to ask about their fee structure up front before anything else.
Another type of fee schedule is the per trade basis which means that you pay a small fee for each and every trade regardless of its size or value. What this means in layman’s terms is that you will pay more for buying low and less for buying high. This type of schedule is typically used by full-service brokers because it represents their income better than flat fee schedules do.
The Bottom Line is this:
When you are looking to invest, there are a ton of things you need to know before taking the plunge. In addition to finding the right broker you need to learn how your money will be managed, what type of research is available, and whether or not their fee structure is something that would work for you.
Finding a good broker can be difficult but it doesn’t have to feel like an uphill battle. Taking the edge off will help you to better understand the various types of brokers so that you can make a decision with ease. The sooner you get started, the more money you will have for retirement!