Stock Brokers & Brokerage Accounts

 

Basics

When you purchase financial securities, like stocks and bonds, you do this through a stock broker, also called "registered representative", "broker" or "rep".  These are employees of a stock exchange member/dealer.  Even if you trade on the internet, these "trades" are through a stock exchange member/dealer.  Once you decide to trade you need to open a "brokerage account" which allows you to purchase stocks, bonds, mutual funds, and in some cases other types of investment securities using a professional to buy or sell items you designate.   Both stockbrokers and financial advisors are licensed by the Financial Industry Regulatory Authority (FINRA), previously called the National Association of Securities Dealers (NASD).
http://www.finra.org


There are three major types of brokerage firms:  Full Service, Discount, and Online.  However the term "online brokers" has blurred, since most full service and discount brokers also provide online services.  In order to determine which type of firm is best for you, you need to determine the type of investor you are and what services you need.  Whichever you choose, make sure you understand all the costs associated with opening up and maintaining the account.  In order to open an account you must be over 18, so if you are under 18 you will have to have permission from an adult to trade on their account.

 

How To Choose The Type Of Brokerage Firm

There are two critical questions you need to ask yourself when you are researching and then selecting a brokerage firm.  Based on the answers to these question should determine the type of services you need and which ones you should be willing to pay for.

What type of investor are you? How often do you plan to trade?
  • Passive Investor(Few Trades):  An investor who researches your options, purchases them and then holds them for a long time
  • Moderate Investor (Occasionally Trades):  An Investor you wants want to check on your portfolio weekly to see if you might want to make an investment or change.
  • Active Investor (Frequently Trades):  An investor who buys and sells stock on a daily basis.
What Services do you need?
  • Customer Service:  An investor who prefers to have an experienced investment advisor to call or visit to discuss their options.
  • Do-It Yourself:  An independent investor, one who makes their own decisions.  Most often uses online investment tools and research for their decisions.

 

What Does Each Brokerage Firm Have To Offer?

Services:  What kinds of investments can they help you with?  Stocks (see Stocks: Buying, Selling & Researching, Bonds, Mutual Funds, Exchange Trade Funds (ETFs), U.S.Treasury Offerings, Certificate of Deposit (Cds) , Individual Retirement Account (IRA) etc.  Can they provide help with mortgages or insurance?  Do they provide financial planning?  Do you have your own personal account advisor; a technical person on the phone, or none of the above?  How easy is it to receive help?  What service do you need?  Do they provide checking, ATM or other basic banking services?  Is that important to you?



Research & Research Tools:  Are you the type of investor who requires a great deal of information before you invest?  Do you want to have access to a data base, need someone to feed you information, or do you like to find it on your own?  Is the research offered done "in-house" or is it provided by outside independent companies?  What research tools do they provide (see Stocks: Buying, Selling & Researching )?  Do they also offer graphs and charts?  Is the research easy to use and understand?
Costs:  What are the trading costs?  Are they per trade/transaction or asset based fee (a percentage of all the assets you have in the brokerage account)?   Are there maintenance fees?  Do they impose inactivity or small balance fees? 
Account Information:  Is the statement easy to read?  Can you figure out your profit and loss on a transaction?  Are all the fees clearly stated?  How often are your statements sent out or updated?
User Computer Interface:   If you decide to invest online how easy is the site to navigate?  Can you find the information you need quickly?

 

Full Service Brokers

These firms are generally large and provide the most extensive list of services.  Most allow you to select an individual account advisor.  These professional advisors can also act as financial advisors providing guidance on which investment might be right for you.  These firms create their own research and recommend stocks to either buy or sell.  These firms have traditionally charged a commission each time a stock was bought or sold.  Commissions vary according to the number of shares and the dollar involved, but average about 2%.  These firms also offer two different but similar types of accounts where you pay a fee vs. a commission:

  • Asset-Based Fees:  An asset-based fee is one where the broker charges a fee based on the size of your portfolio (assets under management), which could be from 1.5% to 0.75%, instead of per transaction commission fee.
  • Wrap Account Fees:  This is similar to an asset-based fee program, where you pay a percentage of your assets vs. commission.  You get an outside money manager, vs. a stockbroker.  The fee is generally higher than an asset-based fee from .06% to 3% and a minimum portfolio size is
Full service brokers also offer a wide variety of services such as credit cards, bill paying, ATM and other options.  Full service brokers are an excellent option for those with large portfolios, users who want to get advice before they make investment decisions, and those seeking comprehensive research that want to be able to pick up a phone or meet with their advisor.

Selecting A Full Service Broker/Advisor

If you decide to use a full service broker, not only do you have to decide which firm, but you also need to select an individual broker.  Certainly if a friend has used one and is happy with their services, add them to your list.  When you talk to your friends:

See if their investing goals and styles are similar to yours. 

  •  Are they frequent or infrequent trades? 
  •  Do they speak to their broker frequently or only once in awhile. 
  •  Are their telephone calls returned in a timely manner? 
  • Are the statements easy to understand? 
  • Have they found the research reports and recommendations accurate? 

Obviously no one can predict the market 100% of the time.  Meet with some brokers, also find out:

  • A brokers education, background and experience.
  • What is their approach to investments? 
  • Do they ask you questions about your goals or financial situations?
  • Are they good listeners, or are they only salespersons? 

If they promise to make you rich, run.  Do you get along well with the broker; are they easy to talk to?  Make sure they will follow your advice, and be comfortable with the person if you have to disagree with their recommendations.  After you select a broker, give it time to develop.  If you are unhappy, find another broker or brokerage.  Generally there is no account minimum, but an annual fee minimum of $1,500.  Each brokerage has many asset based fee type of accounts, with a variety of services.  You need to investigate them, and then you need to make sure you only pay for the ones you need.  Finally make sure the fees you pay warrant the amount of service being provided.

THING TO LOOK OUT FOR (These also apply to Financial Advisors): 

 DANGER SIGNALS!

Most broker/agents are hard working individuals who try to help their clients.  But unfortunately there are always a few who try to take advantage of people.  This is why you have to monitor your broker's activities (Keeping Records).  Here are a few that indicate trouble. 

  • Unauthorized Trading:  Trades would not be made without your permission.   If a broker asks you to sign a discretionary authority over your account (meaning they can do whatever they want), DON'T SIGN, LEAVE.  If you see a trade you did not authorize, you must bring it to their attention immediately.  Keep a log of when you authorized trades, and certainly when you see a unauthorized trade, if it occurred, when you notified your brokers, what they did, when it hopefully was corrected, when your account was properly adjusted.
  • Churning:  This is a term used to describe the activities of brokers who trade excessively in order to run up their commission.  But it is not beneficial to the clients.  Churning is illegal under the SEC rules, but it is difficult to prove.  Again keep good records and notes on conversations.
  • Failure To Execute:  Brokers are supposed to execute your orders and in a timely manner.  If the brokers fails to obey your order or caused a lengthy delay you should complain. 
  • Misrepresentation of Risk:  If they are making a recommendation, they should provide you accurate information about potential risks.  Almost all investments carry some risks, and some a lot more than others.  If they don't provide a risk assessment, demand one, preferably in writing.
  • Inappropriate Investment Recommendations:  One reason you are paying the big bucks for a Financial advisor or a Full Service Broker/Advisor is that they are supposed to know your investment goals and help you try to reach them.  If, I know it is a long way off, if you are about to retire, and your broker suggests you put most of your money in a speculative stock, RUN.

Things To Do If Something Goes Wrong

Get your records together.  Review any documents you signed when you opened your account (The Fine Print).  This might limit your options.  Document, Document, Document!  Take notes and dates of all conversations.

Speak to Your Broker...if that doesn't work

Talk to your brokers Boss...if that doesn't work

Contact the Compliance Director, at the firm's headquarters.   In most cases you are limited to an industry arbitration process.  Many cases try to use mediation first before arbitration.

Based on the agreement with the brokerage firm, you may be able to go to Small Claims Court; also this will be determined by the amount of the claim.

For most complaints you can contact the Financial Industry Regulatory Organization.  Hopefully it will never get this far!  Further information contact:
Financial Industry Regulatory Organization:    http://www.finra.org/

 

 

Discount Brokers

Most of these firms only execute your orders; they don’t recommend stocks or do research.  Discount Brokers:

  • Do business over the phone or on the Internet.
  • Since they do not have to support a research department nor spend time with clients, they can charge less.
  • You will pay less than a full service broker.
  • In order to be more competitive some are now offering limited amounts of research, online investment libraries and some services provided by traditional full-service brokers, but these are for an additional service fees. 
  • Discount brokers also offer no-load mutual funds Mutual Funds with no transaction fee.
  • Discount brokers charge a minimum commission of at least $20 and a higher rate of $45 for a broker assisted trade. 
  • For small trades these might even be higher than a full service brokerage. 
  • If you are willing to complete the trade yourself without assistance using the Internet or touch-tone phone, you may save even more. 

Make sure you know all the charges upfront.  Discount Brokers may also require a minimum level of activity for an account or charge a minimum fee.  Also see if they charge you a maintenance fee and if so what it is.  If you are an active independent investor, you could save a lot.  But again, the lines are being blurred between discount brokers, full service and online brokers since all offer “online” services.  These are excellent resources for individuals who are comfortable doing their own research and making their own decisions; do at least 15-20 trades a year, want to save money on trades and keep their costs; and are willing to pay for additional services if needed.

Online Brokers

There are a few Online Brokers Only, but almost all full-serivce and discount brokers offer online services, they have to in order to compete.  Originally Online brokers were designed for frequent traders, those who like to buy and sell often.  Most will respond within five minutes of service requests, and are virtually instantaneous with transactions.  Many have a large number of no-load mutual funds, with no transaction fees, but the online brokers vary on the number offered.  Again, look for hidden fees and fees for small balances or infrequent usage.  See if your online brokers quote stock prices in real time or delayed 20 minutes.

 

Opening A Brokerage Account

This is similar to opening a bank account with some additional information required.  There is also likely to be a minimum investment required which could be as low as $500 or $1,000.  There are options when you open an account:
  • Single Account:   Only one individual person is allowed to trade.
  • Joint Account:   Two adults
  • Cash Account:   When you make a purchase you have to pay 100% within a few days.  This is the safest route.  If you don’t have the cash, don’t buy it.
  • Margin Account:  Where you borrow money from your brokerage account to purchase a security, for which they charge interest.  You have to put up a minimum of 50% or more, with a $2,000 minimum to open an account and some firms require more.  Rules for margin accounts are set by FINRA (Financial Industry Regulatory Agency http://www.finra.org/index.htm . If the price of a security declines by a certain amount, generally by 30%, then the broker will ask you to come up with the cash immediately by selling other securities to make up the amount or cash.  These accounts require a higher minimum. They should also be used only by seasoned investors.  Margin accounts can be very dangerous, especially in a declining or volatile market.  You need to know all the rules and regulations regarding this type of account.  For further information you can also go to the SEC (Securities and Exchange Commission Website: http://www.sec.gov/investor/pubs/margin.htm .
  • How Do You Want Securities Held?  You will be asked if you want to keep your securities such as stocks and bonds in your own name, or "street name".  If it is in your name, all certificates will be sent to you for safe keeping.  Most people however, use the "street name".  Here a firm keeps track of the shares. They are safe and liquid, in case you want to trade them.  Dividends are sent to the brokerage firm, and they will then follow your instructions if you want them re-invested or sent to you.  Your shares are protected by the Securities Investor Protection Corporation http://www.sipc.org.

 

Keeping Records

Keep track of ALL your purchases and sales and instructions to your broker/financial advisor.  These are normally also provided in a monthly account activity statement.  But keep your own set in case there is a dispute.  You will also get a 1099 form summarizing your annual activity for tax purposes.

In case something goes wrong you will need your records.  In  our section Selecting a Full Service Broker/Advisor - Things To Do If Something Goes Wrong , will explain what your options are if instructions are not followed or trades are not made (see Stock Brokers & Brokerage Accounts).

A Few Full Service, Discount & Online Brokers

A.B. Watley:  http://www.abwatley.com
Ameritrade:  
http://www.tdameritrade.com
Bank of America:  
https://www.bankofamerica.com
Charles Schwab & Co.:  
https://www.schwab.com
Citi:  
http://www.citibank.com/us/home.htm
Edward Jones Investments: 
http://www.edwardjones.com/en_US/index.html
E-Trade Financial:  
https://us.etrade.com/e/t/home
Fidelity:  
https://www.fidelity.com
First Trade:  
http://www.firstrade.com
Goldman Sachs:  
http://www2.goldmansachs.com
Merrill Lynch: 
http://ml.com
Morgan Stanley: 
http://www.morganstanley.com
Muriel Siebert: 
https://www.siebertnet.com
Options Express:  
http://www.optionsxpress.com
Prudential:  
http://www.prudential.com/view/page
Scottrade:  
http://www.scottrade.com
Sharebuilder – ING Direct:  
http://www.sharebuilder.com
T.D. Ameritrade: 
http://www.tdameritrade.com
TradeKing: 
http://www.tradeking.com
Vanguard:  
http://www.vanguard.com
Wall Street*E: 
http://www.wallstreete.com/wsetv/index.php
Wells Fargo Advisors (formerly Wachovia & A.G. Edward:
https://www.wellsfargoadvisors.com