A broker, also known as a brokerage, is a company that connects buyers and sellers of investment vehicles like stocks and bonds. A brokerage account is often where an investor keeps assets. In general, there are three types to choose from. Which type you choose depends on your needs and preferences.
Key Takeaways
- A brokerage account is an investor's financial account with a licensed brokerage to buy andsell securities.
- Different firms are geared toward various investors based on experience, the desire for support, and asset levels.
- Traditional and online self-directed programs are popular with various investors, especially those who are comfortable researching and interacting with an interface rather than a person.
- Human advisors are a better option for those who would rather interact more directly with a financial professional.
- A robo-advisor automates investing and uses technology to manage your portfolio.
Quick History of Brokerages
Before the middle of the twentieth century, access to stock and bond markets was restricted to those with enough money to invest and use a human broker's services.
In the 1970s and 1980s, "discount" brokerage firms such as Vanguard and Charles Schwab emerged. They were willing to take on a less affluent clientele because their business models were designed around investor volume.
Online brokerages such as E*TRADE, FOREX.com, and Ameritrade (now TD Ameritrade, under Charles Schwab) flourished as they seized the opportunity created by the internet at the turn of the century. New technology reduced costs and allowed them to extend the discount brokerage model by reducing commissions and minimum balances.
Brokerages exist to allow public access to the exchanges. Without brokers, investing as it is today would not exist.
The Rise of Self-Directed Investing
Online brokerage accounts brought about the self-directed investor. These investors conduct investment research and choose which stocks and bonds to buy for their portfolio.
In addition, a new development over the past few years has been the advent of the robo-advisor. These automated software platforms, often available as mobile apps, take care of nearly all your investment decisions at reduced costs.
Arguably the first robo-advisor—and first to offer cryptocurrency portfolios—Betterment launched in 2010 after the Great Recession. Since then, robo-advising has seen exponential growth in adoption and a flurry of startups and existing brokerages adding a robo-advisor arm.
A vast array of traditional, discount, and online self-directed brokerage platforms are available, each with pros and cons.
Human Brokers and Financial Advisors
Some people prefer to have a human handle their finances. If this is you, then a traditional advisor may be a better fit than a robo-advisor. Human brokers and financial advisors have been around since the beginning of modern stock markets, and they've carved out space in today's competitive landscape by catering to investors with a higher net worth or those who prefer human interaction.
Good financial advisors build and monitor investment portfolios and offer advice in many aspects of their clients' financial lives. They also provide auxiliary services such as insurance, estate planning, accounting services, and lines of credit.
Customers of these brokers can expect to pay 1% or more of their assets under management to the advisor; sometimes, they may pay up to $50 per trade for individual transactions. Many advisors claim that these fees are well worth the extra value they bring, such as picking stocks for their clients’ portfolios, accessing unique products and offerings, or building comprehensive financial plans.
Many advisors are available by phone or email and are quite responsive. They also can meet with their clients in person when needed.
When comparing brokerages, pay attention to what the advisor is telling you. The brokerage may require them to push prepackaged investments, funds, or financial plans; if this is the case, make sure you ask about building a plan that fits your needs.
Also, pay attention to fees. If they're charging more than 1%, ask why and judge for yourself whether the extra cost is worth it. Professional certifications such as the Certified Financial Planner (CFP) or Chartered Financial Analyst (CFA) designation show that your broker has been trained and has passed a series of rigorous exams related to financial markets and planning.
You could also use FINRA's BrokerCheck tool to see if the broker has been subject to regulatory complaints or ethics violations.
Online Self-Directed Broker Accounts
Online self-directed platforms include E*TRADE, TD Ameritrade, Robinhood, and many others. Be sure to check your bank—you may already have access to a self-directed online brokerage account.
For the most part, these platforms leave it up to you to figure out which investments are the best, but they typically offer a suite of research and analysis tools. Many provide expert recommendations and insights to help you make informed decisions. You are then on your own to execute the trades to build your portfolio through their website or mobile app.
Human advisors charge higher fees than robo-advisors or platforms that facilitate self-directed investing.
These platforms may charge a per-transaction commission per stock trade and extra per options contract. However, zero-commission trades have become the norm among discount brokers in recent years. In addition, they let you trade on margin and create options strategies. You can also invest in mutual funds, individual stocks, foreign exchange (forex),and exchange-traded funds (ETFs).
Online brokerages are best for the self-directed investor who knows about the markets or conducts research to choose a portfolio best suited to their goals. If you're only going to make a few trades a year, you may want to pay a little more per trade to get access to higher-quality research and analysis. If you're a day trader, you'll probably want to consider a site that gives its most active users free trades.
Robo-Advisors
Robo-advisors automate investing and use technology to manage your portfolio. Since Betterment launched in 2010, there has been a proliferation of startups and existing financial companies offering this algorithmic trading service.
Unlike the trading algorithms that power the high frequency trading (HFT) desks at hedge funds and banks, robo-advisors are likely to put your money to work using low-cost, indexed ETFs. In fact, the convergence of ultra-low-fee ETFs with low-cost technology solutions available on mobile platforms makes robo-advising possible.
You can now invest as little as $1 on some platforms for 0.15% per year in fees. Many venues don't charge an advisory fee, but they charge for optional add-on services.
Before robo-advisors, if you had only a few hundred or thousand dollars to invest, you'd have to go online to a self-directed platform. Now, you can put $200 or $2,000 to work without having to conduct any investment research, pick any individual stocks, or worry about rebalancing your portfolio.
Algorithm-based robo-advisors aim to place you in an efficient and diversified passive portfolio. The best robo-advisors will even tax-optimize your portfolios with tax-loss harvesting, a process by which an investor sells losing positions to offset the capital gains generated by winning positions. The algorithms themselves are a proprietary company secret of robo-advisors.
Robo-advisors are ideal for new or young investors who don't have much to invest. These platforms are also suitable for people who are fans of passive investment strategies because your robo-advisor develops a portfolio of indexed ETFs on your behalf.
Robo-advisors also shine for those long-term investors who lack the time or desire to research and find the ETFs that meet their investing needs and strategy.
If you're a more sophisticated investor or trader who needs margin, options trading, and technical charts, a robo-advisor may not fit your needs.
But robo-advisors are certainly not for everyone, as they may not provide access to more complex products and strategies embraced by some investors. Many brokerages are adapting their robo-advisors to allow for more customization in their portfolio choices.
If you choose a robo-advisor, the factors to consider are primarily cost, reputation, and added services. Ensure that you monitor the cost of extra services: some are free, but others might add extra costs.
What Type of Brokerage Account Should I Open?
Determining the best brokerage account to meet your needs depends largely on how much guidance you hope to receive. If you prefer the human touch and want an expert to help you navigate the complexities of the financial markets, you may opt to work with a traditional financial advisor. If you're comfortable researching investments and managing your own portfolio, you can take the reins of a self-directed brokerage account. If you're looking for a basic platform to help manage your portfolio at a lower cost, you might consider a robo-advisor.
How Much Money Do You Need to Start a Brokerage Account?
While some brokerages may require minimum deposits, plenty of firms allow you to open an account without any deposit requirements. This makes it possible to get started even if you have only a few dollars to invest. In many cases, you can even buy fractional shares of a stock or exchange-traded fund (ETF), allowing you to trade smaller amounts even if you don't have enough capital available to buy a full share.
What Is the Best Type of Brokerage Account for Beginners?
For those just starting off on their investing journey, it's important to choose a brokerage account that is easy to use and offers a variety of options for building a portfolio. Beginners may benefit from platforms with robust educational features that help them grow their financial knowledge and paper trading to gain experience before risking real money. If you're just getting started, you also might want an account with low (or zero) minimum balance requirements. Robo-advisors may be a good choice for beginners because they automate the decision making process so that investors can invest and forget it.
What Is the Safest Type of Brokerage Account?
No matter what type of brokerage account you open, investing always involves some risk. That said, working with a traditional financial advisor can help you ensure that you are making optimal investing decisions. While a robo-advisor is obviously less capable of assessing your personal situation and goals, it can still play a role in helping you set your portfolio. Self-directed brokerage accounts provide neither human nor algorithmic guardrails, leaving the decisions and the risk mitigation entirely up to you.
The Bottom Line
From traditional full-service firms with centuries of history to established online brokers to newer upstarts challenging the paradigm, you have a huge array of options when choosing a brokerage account. Some of the most important factors to consider include the level of services and support you need as well as the amount you have to invest.
If you have a lot of assets or would like more personalized guidance, it may be worth working with a traditional financial advisor. Meanwhile, a robo-advisor might be ideal if you're looking for more limited direction with lower fees. Finally, if you're comfortable doing the legwork on your own, you can invest via a self-directed account. No matter which type you choose, your brokerage account can become a key vehicle for growing your wealth and reaching your financial goals.
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Brokerage and Brokerage Account
A brokerage, also known as a broker, is a company that connects buyers and sellers of investment vehicles like stocks and bonds. It acts as an intermediary, facilitating transactions between investors. A brokerage account is a financial account with a licensed brokerage where investors can hold their assets, such as stocks, bonds, and other securities [[1]].
Types of Brokerage Accounts
The article mentions three types of brokerage accounts that investors can choose from based on their needs and preferences:
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Traditional Advisor: This type of account involves working with a human financial advisor who provides personalized guidance and assistance. Traditional advisors often cater to investors with a higher net worth or those who prefer human interaction. They offer services such as portfolio management, investment advice, and auxiliary services like insurance and estate planning [[2]].
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Online Self-Directed: Online self-directed brokerage accounts, such as E*TRADE, TD Ameritrade, and Robinhood, allow investors to conduct their own investment research and make their own investment decisions. These platforms typically provide research and analysis tools to assist investors in making informed decisions. They are suitable for self-directed investors who are comfortable managing their own portfolios and conducting research [[3]].
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Robo-Advisor: Robo-advisors are automated software platforms that use technology to manage investment portfolios. They typically use algorithms to create and manage diversified portfolios of low-cost, indexed ETFs (exchange-traded funds). Robo-advisors are ideal for new or young investors with limited funds, as they offer low-cost investment options and automate investment decisions [[4]].
History of Brokerages
Before the middle of the twentieth century, access to stock and bond markets was restricted to those with enough money to invest and use the services of a human broker. In the 1970s and 1980s, "discount" brokerage firms emerged, such as Vanguard and Charles Schwab, which catered to less affluent investors by reducing commissions and minimum balances. The rise of the internet in the early 2000s led to the flourishing of online brokerages like E*TRADE and TD Ameritrade, which further reduced costs and extended the discount brokerage model [[5]].
Robo-Advisors
Robo-advisors automate investing and use technology to manage investment portfolios. They typically use low-cost, indexed ETFs to create efficient and diversified portfolios. Robo-advisors are suitable for new or young investors with limited funds, as they offer low-cost investment options and automate investment decisions. They may also provide tax optimization features and other services [[6]].
Factors to Consider
When choosing a brokerage account, several factors should be considered:
- Level of Guidance: Determine how much guidance you need. If you prefer personalized advice and assistance, a traditional advisor may be suitable. If you are comfortable conducting your own research and making investment decisions, an online self-directed account or a robo-advisor may be more appropriate.
- Cost: Consider the fees associated with each type of account. Traditional advisors typically charge a percentage of assets under management, while online self-directed accounts and robo-advisors may have lower fees or even offer zero-commission trades.
- Services and Support: Evaluate the additional services and support provided by each brokerage. Traditional advisors may offer a range of auxiliary services like insurance, estate planning, and accounting. Online self-directed platforms may provide research tools and expert recommendations. Robo-advisors may offer tax optimization features and other automated services.
- Investment Knowledge and Experience: Assess your own investment knowledge and experience. If you are a beginner, platforms with educational features and paper trading options may be beneficial. If you are a more experienced investor or trader, you may require advanced features like margin trading and options trading.
Minimum Deposit Requirements
While some brokerages may require minimum deposits, many firms allow you to open an account without any deposit requirements. This flexibility enables individuals to start investing even with small amounts of capital. Some platforms even allow the purchase of fractional shares, making it possible to trade smaller amounts [[7]].
Best Brokerage Account for Beginners
For beginners, it is important to choose a brokerage account that is easy to use and offers educational features. Look for platforms with low (or zero) minimum balance requirements and robust educational resources. Robo-advisors can be a good choice for beginners as they automate investment decisions and provide a passive investment strategy [[8]].
Safety of Brokerage Accounts
Investing always involves some level of risk, regardless of the type of brokerage account. Traditional financial advisors can help ensure optimal investing decisions, while robo-advisors can assist in setting up a diversified portfolio. Self-directed brokerage accounts require investors to make their own decisions without guidance. It is important to understand the risks involved and make informed choices [[9]].
In conclusion, brokerage accounts come in different types, including traditional advisor accounts, online self-directed accounts, and robo-advisor accounts. Each type caters to different investor preferences and needs. Factors such as guidance, cost, services, and investment knowledge should be considered when choosing a brokerage account. It is also important to be aware of minimum deposit requirements and the level of risk involved in investing.
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