By Michael Vodicka
Partnerships are a critical component of success. Great partners help people achieve great results, but a weak link can be a huge drag on performance. That applies to education, business and personal relationships.
Nowhere is this more apparent than investing. Investors are tasked with creating key partners that will help them effectively navigate a volatile and complicated global market.
A great investment adviser is an investor's most important partner and resource. (Last month, I wrote about the benefits
of working with a registered investment adviser
instead of a broker
.) But a very close second is a partner that some investors take for granted. In fact, without one, investors wouldn't even be able to buy or sell stocks and bonds.
I'm talking about brokerage firms.
No doubt about it -- there are huge differences among the hundreds of brokerage firms available to investors. In this age of advanced technology, investors are flooded with an ever-growing universe of brokerage firms that offer a wide variety of products and services.
But that's not a bad thing.
Brokerage firms have continued to raise the bar through the years, offering better products and services at a better price that has led to a better user experience.
And those differences can have a big impact on the performance of your portfolio. That's why it's so important to understand how to evaluate a brokerage firm.
There are seven key questions every investor should ask, to find a brokerage firm that provides the perfect mix of price and service.
1. How much does it cost?
Opening up a brokerage account is free. There usually aren't any start-up fees or hidden expenses. But moving forward, the way the brokerage firm makes money is by charging a commission to process customer trades.
This is the primary revenue model for brokerage firms. But there is a big difference in what brokerage firms charge per trade. Scottrade, for example, advertises a flat rate of $7 per trade. Interactive Brokers, however, advertises at just $1 per trade, with a $10 monthly minimum. Charles Schwab advertises one equity trade for $8.95.
Whether you are a buy-and-hold investor, a day trader or something in between, your biggest expense is the cost of executing a trade. That’s why it's so important to find a brokerage firm with execution costs that fit your budget.
2. What service and support is offered?
Pricing discrepancies among different brokerage firms typically aren’t arbitrary. Higher execution costs are usually associated with different levels of service.
If you're only paying $1 a trade at a discount broker
, it is highly unlikely you will receive any investment support from a broker, investment adviser or dedicated consultant. However, if you move up into premium execution services -- ranging anywhere from $20 to $50 per trade -- you will most likely be able to use live support and a dedicated broker or adviser. And while self-directed accounts continue to gain popularity, having a live insider for trade support and specialized research can be a valuable asset and worth the cost of higher-priced execution.
3. What online tools are offered?
In an age when digital information flows freely in real time, investors are extremely demanding when it comes to online tools to monitor and analyze their portfolios. And there is a big difference among brokerage firms here as well.
Bigger players in the industry such as TD Ameritrade
) have powerful financial resources to build customized interfaces and portals for their customers. This includes real-time portfolio monitoring, analytics and research. For investors who want real-time access to their investment accounts, these features are critical. But for a long-term buy and hold, a real-time interface makes little difference.
4. How much proprietary research and analysis is offered?
Speaking of research, many brokerage firms offer in-house and third-party market research to their customers. The research can be in the form of reports on individual stocks, market updates or analysis of fixed-income yields. This can be a great source of information for more-active investors and provide greater depth than might be available through traditional newswires and mainstream research.
5. Do they offer access to international markets?
We've been operating in a global economy for a long time. Investors no longer think just domestically when identifying potential investment opportunities. That’s why it's important for international investors to have access to global markets. Evaluating whether a potential brokerage firm offers access to international and emerging markets is critical for investors with a global view.
6. Is the firm itself risky?
The brokerage firm industry has suffered from a couple of nasty PR wipe-outs in the past two years. After MF Global lost billions of dollars of client money, investors were put on notice that a brokerage firm can carry a significant amount of business risk. A small online brokerage firm carries a totally different risk profile than industry behemoths such as TD and Charles Schwab.
7. What promotions or incentives are they offering to lure customers?
The brokerage firm industry is extremely competitive. With the implementation of low-cost, online brokers, execution costs across the industry have been falling for many years. And that is a good thing for the consumer. That has created pricing wars in the brokerage firm industry, which use promotions and incentives to lure customers away from each other. Getting free trades for a big year can be a huge cost saver and incentive to go with one brokerage firm over another.
The Investing Answer: Investors interested in opening a brokerage account should make a list of their investment goals and priorities. Figuring out what products and services are important is a great way to identify a brokerage firm that offers the right mix of value and support. And when you’re ready to open a new account, the process is simple, administered online, usually taking only 10 to 15 minutes and involving less than 10 pages of paperwork.
More from InvestingAnswers