Guide to Choosing a Broker

It doesn’t matter whether you’re an old hand when it comes to investing or if you’re in your first job and looking at opening an IRA for that very distant retirement day, you need a platform for buying and selling your interest in investments. In other words, you need a broker.

There are all sorts of different brokers out there, ranging from high-end wealth managers to discount online brokers with low-low rates and even “robo-advisors” that use complex algorithms and AI to help manage funds. In any case the choice of broker you make should be based on your needs and investments strategy, after all their job is to help you reach your financial goals.

Further Reading: Best Robo Advisors | Best Trading Platforms

Top brokers for US investors in May2023

Browser my glance list of the best brokers for US investors, before I go into more details further down this guide.

Choosing the right broker is more than just looking at the trading options, usability of the platform, and even price. Though obviously all those things are important. To get the bang for your buck, you need to find a service that ultimately works for you – not just the broker who came highly recommended from your colleague or your pal down the road. A good broker is there for you and 24/7 is there for you, helping you to reach your financial goals.

Are you on the hunt for your first broker, or looking for something new? In this comprehensive guide, we cover everything you need to know about choosing a broker in the US.

What is a Broker?

A broker is an individual or company responsible for the organization and completion of financial transactions on behalf of their clients. As such a broker can sell a wide range of asset classes, for each of which they are required to have a license or certification. The asset classes include things like stocks and forex, but you’ll also find real estate and insurance brokers. But we’ll leave real estate and insurance brokers for the time being.

Each financial broker chooses what level of service they are providing to their clients, and this ranges from DIY to hands-off to full hand-holding. For example, a full-service broker will provide their clients with data and advice on relevant financial products and based on clients instructions will execute any transactions as required. Other brokers also provide full financial planning and other services, as required. Whilst other brokers focus purely on the day-to-day and just concentrate on executing deals, leaving you to complete research on your own. These are the DIY brokers, and they’re often low-cost online platforms.

To give advice, a broker must be registered with the Exchange Act and also under the Investment Advisers Act. If you’re working with a full-service broker and thus a financial advisor, then the individual needs more training and certifications as well as ideally a degree in finance or banking.

Do You Need a Broker?

The answer depends on what your financial goals are both in the short-term and for the future. However, one thing is certain: your options are limited if you decide to go it alone. For example, whilst you can buy assets without a broker, you will need to buy them individually. For example, you can purchase stocks directly from a public company and become a shareholder through a Direct Stock Purchase Plan (DSPP). However, the process can be convoluted at best, and you’ll still find your access limited.

The average person will need a broker, but you do have a wide range of options.

If you want to play around in the market on your own and are content with average returns, then you can open a dealing account and trade on your own with little intervention from anyone, not counting the fees and various costs you will incur for using the account. A fund supermarket will also allow this. Though, your access will still be limited in some cases. Individuals just don’t have the same access to stock exchanges without a more specialist broker to help navigate, even with a DIY-friendly broker.

Time is another issue that you need to consider. Apart from the long- and short-term time financial goals you may have and the commitment you are making, if you’re not already well-versed in investing, a whip-smart broker can save you both time and money. Simply put a broker can help you can earn even more. Think of it this way, the time and energy you spend on trying out a DIY approach is time that you have possibly lost on securing your long-term growth.

Essentially, if you have financial goals and want to grow your money, then yes, you need a broker — and you should have one before you even make your first trade.

What Kind of Products Do Brokers Offer?

Brokers offer a range of products, but most accounts fall within one of three categories:

• Dealing or trading accounts
• IRA accounts
• 401k

All three of these offer options for investing in securities.

However, IRAs and 401ks come with specific tax-relief benefits available to all US residents. It’s important to take advantage of these trading accounts first before then diving into a regular dealing or trading account, which may be tax optimized but may not be a full tax-wrapper.

At a minimum, you will pay for your account, but if you work with a full-service broker, then you may access other services. These services will also cost you money in fees.

For example, if your broker provides you with market research, investment advice, or other financial planning services, you will pay for these products individually in addition to the financial products that you may have actually purchased.

What Are the 4 Types of Brokers?

In the US, we have four main types of broker:

• Stock brokers
• Full-service brokers
• Discount brokers
• Forex brokers (retail forex brokers)

Each broker offers different services that sit along the same sliding scale.

What is a Stock Broker?

Stock brokers (aka investment brokers) are specialist brokers who do nothing other than manage the buying and selling of shares. You will need a stock broker because as a private individual you cannot buy stocks, but you don’t necessarily need to choose a specialist stock broker.

A full-service or discount broker will also suit you, unless you have very specific plans regarding what stocks you intend to purchase.

What is a Full-Service Broker?

A full-service broker, also known as a financial advisor, offers their clients a full range of services and products providing a complete financial planning service.

Some full-service brokers can also serve as specialist stock brokers, or they might have them on staff. You will find that full-service brokers’ fees are significantly higher than those of the average stock broker. Though, some full-service providers have tried to optimize their fees and segment their services and pricing of these service in order to appeal to a broader customer base.

What is a Discount Broker?

A discount broker only executes trades on clients’ behalf and according to their instructions. They don’t provide research or planning, at least not beyond any information that is freely available or subscription resources on their website. Discount brokers also aren’t licensed to provide finance advice, so there will be little avenues for advice bar basic customer service.

To work with a discount broker, you need to know what you want to trade and when. You simply pay the broker a small fee to complete the trade on your behalf.

The fee structures differ between discount brokers, but they’re generally lower than a stock or full-service broker because there’s less advice and therefore effort before.

What is a Forex Broker?

A forex broker (retail forex broker) deals currencies. While some forex platforms focus solely on currencies, many of the largest brokers deal on both the stock markets and currency exchanges.

How Do Brokers Make Money?

Brokers make money in a variety of ways, and no two brokers’ fee structures are exactly the same.

In the past, a broker may have made the bulk of their money on commissions, but the rise of online trading and online discount brokers have ended those halcyon days of easy money for little work. As a result, the landscape has changed dramatically compared to ten years ago. For example, in 2019, Charles Schwab announced it intended to cut brokerage fees to zero; though, it would still assess certain fees.

That said, there are three primary ways a broker may earn money:

• Brokerage fees
• Commissions and dealing charges (spreads in forex trading)
• Management or advisory fees

Brokerage fees are charged by full-service brokers (among others) as the premium clients pay for account maintenance, providing research, and access to investment platforms. They also protect the brokerage in the event that you stop trading for a period of time, during which time the brokerage is missing out on its usual incomes through commissions or dealing charges.

Commissions are sometimes referred to as trading fees, and they’re used to pay for the cost of executing the order as well as for investment advice. These fees tend to be tiered according to the number of trades that were completed in the past month. They are the carrot that is there to encourage you to continue trading and prevent trading accounts from going dormant.

Most brokers use a flat trading fee, but you may find that larger trades fall out with the commission structure. For example, Merrill has joined others in providing $0 commissions on online stock trades, and no-transaction-fee funds make it an attractive bargain. But the company has higher margin rates than competitors and as such may not be the best fit for investors who use margin as an integral part of their investment strategy. Management fees are charged by companies that provide access to funds. All funds are managed either actively or passively, and the management fees go to the fund manager who guides the fund. Most fees are based on the assets under management (AUM) in funds, but not all firms operate this way.Because of the shifting landscape, some brokers may assess one or more of these fees and charges. You need to read each broker’s fee structure carefully to fully understand their costs.Finally, remember that these are the primary fees that are assessed monthly, quarterly, or annually. You’ll also pay fees for additional services, such as same-day bank transfers or rematerialization. Don’t forget about the additional fees and taxes.

What Fees Should You Look For?

What are the average fees assessed by US brokers?

In an open market fees and pricing models can vary wildly. Even though they may only be the difference of a 0 or a decimal point, those small changes can make a huge difference in your gains and losses.

Are There Firms Who Charge No Fees?

If saving money on fees and costs is your primary goal, then you’re probably best served by a discount broker, who usually operates solely online. Unfortunately, trading shares is rarely ever free, unless you become your own broker, which will almost certainly require more time, effort, and money than simply working through a discount broker.

Online discount brokers have the lowest fees, but you will still pay dealing charges usually based on the number of trades you completed in the previous month.

Remember: at the very least, you need to pay for access to those securities that you’re interested in. There is no such thing as a free meal and trading is never free.

How to Find Your First Broker

Your investor type plays the most significant role in creating your short list of potential brokers. The charges and fees and comparative services are likely to play the next biggest role.

But in a world where so many brokers now have to compete with intelligent, low-cost options, making the decision is increasingly difficult. However, you might find that you can eliminate some brokers from your list by using the following initial checklist:

• Your broker has two years of history
• Your broker has a dedicated customer support team
• Your broker processes deposits and withdrawals within two days (and offers a same day option at a fee)
• Your broker also works in other countries
• Your broker speaks your native language

Additionally, you should check each broker on your short list with:

•  Financial Industry Regulatory Authority (FINRA)
• Securities and Exchange Commission (SEC)
• And relevant state regulators

Any choices on your list must have full accreditation and protection from the US governing bodies.

How to Narrow Down Your Options

Finding the right broker is imperative because you really don’t want to waste time and money making a wrong decision. Every misstep prevents you from being that much closer to your financial goals.

One of the best ways to find the right broker for you is by asking around and getting referral from someone who has a similar outlook on finances as you do as well as your trading type (discussed below). You can ask colleagues in your office, including and especially those working in your firm’s finance department. However, if you’re new to investing, then you need a broker who regularly works with new investors.

It’s also helpful to look at the tools and research assets that are offered by your broker’s website and platform. Some brokers excel at providing their customers with the information needed to help them trade in confidence and make informed decisions: those that do may invest in quality financial journalists who provide the latest news as well as an excellent education team who complete guides for both novice and regular investors. Even as a professional investor, the charts and research tools available at your disposal are critical to your success.

If you can get everything you need on one platform, then not only will you be more confident in your decision making but also you will be able to read and predict market trends and stay ahead of the curve.

A significant decision will also be in whether you choose a full-service or a discount broker. While there’s a wide chasm between the two brokers’ services, discount brokers are catching up by providing value in ways that aren’t as costly as customized advice.

Who Should Choose a Full-Service Broker?

Full-service brokers were the only real option for decades, and while they’re no longer the only players in the game, they are still providing a vital service for their target market.

You might benefit from a full-service broker if you are someone who is a high-earning individual or have recently inherited a substantial estate. While full-service brokers aren’t as expensive as they once were, they are more inclined to manage wealth accounts. They also provide the hands-on advice needed to strategically invest large sums of money in a tax-efficient way.

A full-service broker also appeals to those who have a significant amount to invest and who don’t have the time or desire to manage their accounts. In this case, a full-service option is much a matter of convenience as it is an investment strategy.

It’s important not to confuse the services offered by these firms as the kind of hand-holding a new investor might appreciate. Also full-service brokers may also set account minimums that today’s average investor might find unattainable.

The good news is that just as full-service brokers have adjusted their fee schedules to be more competitive, so too have discount brokers adjusted their resources to appeal to a broader range of clients.

Who Should Choose a Discount Broker?

Discount brokers (including most online brokers) date back to the 1970s and are a byproduct of the deregulation and democratization of the markets that took place in that time. Charles Schwab was one of the first, and the company sparked a revolution. The development of the internet has helped extend the reach and brought the possibility of trading to millions all over the globe. Online trading platforms make access even simpler and less expensive, allowing brokers to pass the savings on to clients.

You should choose a discount broker if you feel confident enough to operate a trading platform (either desktop or app) and if you’re primarily (but not only) interested in setting up products like low-fee mutual funds or ETFs. Discount brokers also offer cheap dealing and trading accounts, but you may need to acquaint yourself with the tools and resources needed to make decisions on your own time.

Discount brokers also appeal to those who already have professional financial advice available to them and who have little-to-no interest in working with another full-service broker.

Who Should Choose a Robo-Advisor?

For a growing number of people, the relatively new robo-advisors service is an increasingly attractive and sensible option. Brokerage companies are increasingly adding robo-advisors as an option to clients, among their more traditional portfolio of product offerings.

That said it must be stressed that a robo-advisor and a discount broker are not the same product.

Robo-Advisors

They differ in important ways, including in the way they make investment decisions, the minimum funding requirements, and the fee structures.

Robo-advisors are investment managers powered by a combination of advanced machine learning and complex artificial intelligence algorithms. They pick the investments in your portfolio on your behalf (based on a survey you will be asked to fill in prior to opening a robo-advisor account). They then invest and reinvest for you, based on your preferences, and all you need to do is provide a way to fund the account, and transactions. You don’t have the option to choose your assets with a robo-advisor as you do with a brokerage (either full-service or discount).Robo-advisors certainly have their place, and there’s no reason you cannot have both a dealing account and a robo-advisor product. However, robos do occupy a different place in investment strategy, and are usually best suited for long-term horizon investments.

Read our in-depth guide to robo-advisors in the US for full details.

How to Determine Your Trading Type

So you have decided that you want to start trading securities online? Before you look for a broker, you need to set out what your trading personality type is and identify your goals. This information will directly inform the type of broker you need and ultimately the individual broker you choose.

In order to determine what your trading type is you first need to understand whether you want to trade or invest. Active trading is a different beast from buying shares and sitting on them. For this type of trading, you will need your broker to do a whole lot on your behalf, as well as requiring access to a superb platform, reasonable dealing fees, and more.

With passive trading, your needs are different and you’re likely to benefit from products that are more retirement-friendly and come with more advice.

What’s the Difference Between Active and Passive Trading?

The debate regarding the differences between active and passive investing is polarizing, but the truth is that both strategies have their own merits. Your choice will depend on your goals as much as your personality.

Active investing takes a hands-on approach to trading and is about trying to beat the market’s average returns. This strategy requires the ability to forecast market developments and take advantage of day-to-day and week-to-week price fluctuations.

The benefits of active investing include:

• Choosing stocks strategically without relying on indices
• Option to hedge through put options and short sales

Passive investing looks towards long-term trends in the market. It requires a different kind of personality, one that knows when to hold on to investments and when to keep a steady hand in the face of turmoil.

Your trading type will determine the kinds of resources you need from your broker, which can include research and education as well as an easy-to-use platform.

Who Are the Biggest Discount Brokers in the US?

The US has a great selection of online discount brokers, several of which have been pioneers in the world of online and also traditional bricks-and-mortar brokerage. Thanks to the internet, fees have plummeted, which makes them more even affordable. And with the increasingly competitive market place, with big firms launching their own solutions, you really are spoilt for choice. Let’s take a close look at some of the more prominent discount brokers in the US.

The Best of the Rest

Who Are the Biggest Full-Service Brokers in the US?

Full-service brokers were once a staple of the financial landscape of the US, but competition from both discount brokers and the rise of the robo-advisor has left them scrambling to reinvent themselves and those who have failed to adapt to the changing financial landscape have been left behind.

Summary

Finding the right broker can be the difference between meeting your financial goals and watching your money disappear sift through your hands, either through poor investment choices or by brokerages draining your funds with costly fees.

Unfortunately, there’s no such thing as free access to the markets because even where it’s possible to purchase single assets, the process is both laborious and expensive enough to put even the most committed investors off trying it again. What’s more, a good broker is worth their fees, even if you dislike paying them.

Finding the right broker requires you to understand both your goals and your investor type. Because while many US brokers offer similar services, even slight variations in their platforms and fees can get in the way of generating better returns on your investments.