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An Investment Broker Must Support Your Unique Investing Needs

Selecting an investment broker is another important decision you must make and will influence which investing techniques, investment types, and overall investing strategies you can use.

Your broker is your gateway to the investing world, and significantly impacts your decision-making process.

There are times when your broker is selected for you, like your employer-sponsored retirement accounts. Otherwise, you're responsible for doing your homework.

What is an Investment Broker?

Trading on the markets and exchanges only occurs between "members". Think of it like going to Costco or Sam’s Club. You have to be a member (i.e. buy and renew a yearly membership) in order to shop at those stores.

Markets require a similar type of membership, and investment brokers are those members. When you open a trading account with a broker, you gain access to their memberships. They arrange and settle trades for you, provide you with information, research, assistance, etc.

In exchange, you pay commissions or fees for your trades.

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Safe Investing Tip:
Pick a broker that's easy for you to use (saves you time), and has low fees (saves you money). You can find almost all the data/information you need for free or just by having account!

How to Select an Investment Broker

Each firm has a unique set of terms and conditions, which will affect your trades and investments.

For example, firms might place minimum balance requirements on their accounts, or have a limited number of investment choices. They may even put trade restrictions in place (particularly for retirement accounts). Also, you may not get access to markets or investment choices that are needed for you to meet your financial goals.

But the most important factor to consider when selecting an investment broker is commissions.

Find the broker with the lowest commission and you'll have a good idea what it costs for "access". Then compare the "extras" being offered by other firms.

To help you get started, here are some good questions related to the type of services your commissions will pay for:

  • What is the minimum balance required to open an account?
  • How much interest do I earn on my account balance?
  • How much does it cost to trade?
  • Do you have different levels of service based on how much I trade?
  • When can I get help (24/7 or specific times during the day)?
  • How can I speak to someone about issues (online, by phone, by email, via instant messaging, etc.)?
  • Where is your nearest "physical" location?
  • What kind of research reports/tools do you offer?
  • Do you offer "no transaction fee" (NTF) mutual funds?
  • Do I have to hold investments for a certain amount of time before I can sell?

Types of Investment Brokers

There are really just two types of brokers; retail and institutional.

Institutional brokerages are market makers (e.g. Cantor Fitzgerald LP). They move millions of dollars into and out of the markets on a daily basis.

Think Duke and Duke from Trading Places.
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Retail brokers are the kind that you and I use. They offer a wide range of tools, investment products, level of service, commissions, fees, minimum balances...even banking options. In one sense, these firms are a lot like credit card companies; many different options, but it is up to you to read the fine print.

Now you may be thinking, "Hey, there are A LOT of different choices, how can there only be two types?".

Believe it or not, retail brokers were once an "innovation" in the financial services industry. Then came "online" retail brokers (vs. traditional brick and mortar kind). Then brick and mortar went online, and online brokers had to differentiate themselves.

At that point, there were pretty clear differences between the different types of investment brokers. They mainly fell into 4 groups, based on the differences in their answers to the questions above, their online presence, and their commissions and fees.

  • Deep Discount (Online only at that time)
    • Zecco, ScottTrade
  • Discount (Online only at that time)
    • E*Trade, TD Ameritrade, TradeKing
  • Full Service (Brick & Mortar with some online capability)
    • Edward Jones, Morgan Stanley, Charles Schwab, Fidelity

As internet technology improved and the exchanges "digitized", these companies competed for new customers (you and me) by improving their web-based capabilities, and the lines between them blurred.

As a broker, competing on price (i.e. lower commissions) requires big increases in trading volumes. Discount brokers began to acquire deep discount brokers as a way to expand their client base.

In response, full service brokers dropped their commissions, improved their online capabilities, and offered more research for free. Discount brokers couldn't offer the same quality of research as the full service brokers, so they dropped their commissions and fees even further.

A new category of firms (e.g. Robo-Advisors) began offering low cost, automated or "passive" investing services at a lower price point, directly competing with full service brokers for new investors.

  • Robo-Advisors
    • Betterment, Wealthfront

"Fintech" start-ups joined the fray too. By leveraging the shift from desktops to phones, they attracted new investors by creating mobile or "app-based" platforms, similar to the original "online-only" offerings back in the day.

  • App-based
    • Acorns, Robinhood, M1 Finance, Stash

The two-front attack on discount and full service brokers forced them to begin merging as a way to increase their customer base, assets under management (AUM), and service offerings.

For example, here are a few of the acquisitions since Betterment was founded in 2008:

    2012 - Zecco acquired by TradeKing
    2016 - Tradeking then acquired by Ally
    2017 - ScottTrade acquired by TD Ameritrade
    2019 - TDAmeritrade acquired by Charles Schwab
    2020 - E*Trade acquired by Morgan Stanley