US News & World Report – How to open your first brokerage account

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A brokerage firm is one of the first places investors consider for buying and selling stocks, bonds, mutual or exchange-traded funds and other investments.

Just like ice cream, brokerage firms can vary greatly in quality, options and price, from the plain vanilla variety – such as a discount brokerage for do-it-yourself investors – to a complicated sundae with an assortment of toppings – such as a full-service brokerage with a broker to advise you. Brokers are individuals or firms who charge a fee or commission for executing trades on behalf of their investors. An investor typically opens an account with a brokerage and then receives assistance from a broker who works there.

Discount or online brokerages for do-it-yourself investors include Charles Schwab Corp., (ticker: SCHW) Fidelity Investments, Scottrade Inc., TD Ameritrade (AMTD) or E-Trade Financial Corp. (ETFC) Examples of full-service brokers include Raymond James Financial (RJF) or Edward Jones.

Some online platforms, such as E-Trade, allow investors to place trades directly with a brokerage for a fraction of the traditional cost or nothing, in the case of Robinhood, a commission-free trading firm in Palo Alto, California, that allows investors to sign up for its app and trade for free without a minimum deposit.

Discount or online brokerages for do-it-yourself investors include Charles Schwab Corp., (ticker: SCHW) Fidelity Investments, Scottrade Inc., TD Ameritrade (AMTD) or E-Trade Financial Corp. (ETFC) Examples of full-service brokers include Raymond James Financial (RJF) or Edward Jones.

Some online platforms, such as E-Trade, allow investors to place trades directly with a brokerage for a fraction of the traditional cost or nothing, in the case of Robinhood, a commission-free trading firm in Palo Alto, California, that allows investors to sign up for its app and trade for free without a minimum deposit.

Choosing a brokerage. Before opening an account, research different brokerage companies to understand each firm’s trading platforms, says Thomas Walsh, a portfolio manager with Palisades Hudson Financial Group in Atlanta. Each brokerage offers slightly different funds and some will have more commission-free ETFs or certain types of securities.

If you plan on hiring a financial advisor, check out the U.S. News Advisor Finder for profiles of advisors in hundreds of cities.

Then compare each brokerage’s trading commissions, account maintenance and closure fees, investment options and accessibility. “Decide on other details, like if you prefer access to a physical branch location or if online access will suffice,” Walsh says. “Make sure that the brokerage firm offers access to the types of investments you would like to purchase because not all do.”

Setting up an account. The process for opening a brokerage account is similar to setting up a bank account, with one important distinction, says Jeremy Hyndman, an investment fraud lawyer at Investor Defense Law in Los Angeles.

For a new brokerage account, you’ll be asked to fill out new account forms that will ask questions about your risk tolerance, investment objectives, time horizon and the extent of your financial knowledge to build an investor profile. Most applications typically require you to also provide your contact information, Social Security or EIN number, marital status, mother’s maiden name, a financial statement listing information for assets or cash you may want to transfer, and sometimes details from your driver’s license.

Many firms will have you rank your investing preferences – for instance, preservation of capital, income, growth or speculation – depending on whether you are a conservative, moderate or aggressive investor.

“Any recommendations the brokerage firm makes should be suitable for the investor based on this profile,” Hyndman says.

That’s an important distinction because a suitability standard isn’t the same as a fiduciary standard. Registered investment advisors, also called RIAs, who may also be broker-dealers in some hybrid formats, must disclose any conflicts of interest and place their clients’ best interests first, ahead of the advisor’s own compensation.

Broker-dealers, on the other hand, are only required to offer investments suitable for their investors, according to the Financial Industry Regulatory Authority. That means broker-dealers can put their interests above their client’s and make recommendations based on commissions. In other words, broker-dealers hope to make money for themselves and their firm, and not you, the investor. Think of them as salespeople who are compensated per transaction whether you make or lose money.

After opening an account, you must fund it based on any minimum requirements and determine your investment strategy according to your age, risk tolerance and cash needs.

“Bond investments will typically be safer than equities, while mutual funds and ETFs typically offer greater diversification than individual stocks,” Walsh says. He also recommends rebalancing your portfolio periodically according to your target asset allocation by selling inflated assets and buying those that are cheap. “The most important thing is not to let day-to-day fluctuations in the stock market affect your long-term investment plan.”

Fees, commissions and account minimums. Costs vary widely by firm, and there may be additional fees to consider besides those for making trades.

“Investors need to make sure they fully understand the fee structure before opening a brokerage account,” says Stephen Rhodes, managing principal at Signify Wealth in St. Louis.

Trading fees, for instance, can vary depending on whether the investment is a stock, mutual fund, bond or ETF. Buying and selling publicly traded stock ranges from $5 at discount brokerages to $80 at full-service firms, Hyndman says. The fees for variable annuities and other complex financial products can equal 8 percent to 12 percent of their purchase price after commissions and other charges.

Trading fees may also be a standard rate no matter how many shares of a particular investment you trade.

“For example, on equity trades when all conditions are met, Charles Schwab will charge the investor $4.95 per equity trade,” Rhodes says. “So if the investor wants to buy one share of Apple (AAPL) stock or 1,000, they would pay a flat fee to Charles Schwab of $4.95.” If the investor later chose to sell those same shares of Apple stock, they would also be charged the $4.95 fee again, he says.

Other common fees include those for withdrawing, transferring or wiring money in or out of the brokerage account. There may also be an annual fee to maintain the account.

“Although many of the top brokerage firms have eliminated this fee, it is still important to confirm that this is the case, prior to opening the account,” Rhodes says.

Some brokerages even charge fees for inactivity. Many firms also reduce fees for retirement accounts or those that meet a minimum threshold for trading activity, which varies by firm, Hyndman says. To keep tabs on fees, investors should check their statements monthly and question any charges they don’t understand.

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