Neither IvyVest nor the author of this article is affiliated with any of the companies mentioned. Nor do we receive any kind of compensation, "affiliate" or otherwise, for directing readers to any of the companies mentioned.
If you are just getting started with investing, some good news -- there has never been a better time to be shopping for an investment account.
The discount brokerage companies that disrupted the business in the 1990s by bringing low-cost service to do-it-yourself investors over the internet have been in a pricing war just about ever since. Combine that with advances in electronic trading, and you can now pay $5 or less per trade. While there are no shortage of options, picking an account that works for you is as important as ever.
The Essential Factors to Consider When Picking a Discount Brokerage
One of the first things you will want to consider when selecting a discount brokerage account is how you plan to use the account. Are you a rational long-term investor primarily looking to purchase ETFs, such as the ones in the IvyVest model portfolio? Or do you also plan to buy and sell individual stocks? Do you plan to actively trade, or only place a trade every few months (if you don't know, read up a bit before you open an account).
If you are focused mostly on long-term investing and don't plan to trade frequently, you will want to pay close attention to the lineup of commission-free ETFs offered. For instance, Vanguard lets you trade its own ETFs totally commission-free if you have a Vanguard brokerage account -- a great deal that can save you as much as $100 every time you re-balance a diversified portfolio.
If you are planning on actively trading stocks, then you will of course be very interested in how much you will have to pay per trade. Most brokerages now charge a flat-rate fee regardless of the size of the order. You will also want to look at:
- Will you have to pay a monthly service charge to maintain your account? Many brokerages will assess a monthly service fee for IRA accounts, which tend to generate less commission revenue for them.
- Is there a minimum level of commissions that you must generate each month to avoid paying a maintenance fee? This is the case at Interactive Brokers, for example.
- Will you be nickle-and-dimed for account statements, tax forms, real-time quotes, etc.?
- Will your money be held by a reputable company with an established history?
- Will you have access to user-friendly tools and research? How important is this to you?
Good Discount Brokerage Options
Here are seven discount brokerages that you may want to use as a starting point for your search. They are grouped in the rough order that we would recommend them to a subscriber to our premium ETF product. If you are not using our service, your own needs might be different, so you should pay less attention to the order.
- TD Ameritrade.At a flat rate of $9.99, TD does not offer the cheapest commissions out there. But it gets our top billing, because it has one of the best lineups of commission-free ETFs in the business, including selections from both Vanguard and iShares. Ameritrade also has the financial security and servicing power of a giant Canadian financial institution behind it, so is able to create a very polished website and offer some nice additional features like ATM cards, linked bank accounts, and in-person service.
- Vanguard. It might not be the first name that pops to mind in a discussion of brokerage accounts, but this mutual-fund and index-investing giant offers a very competitive investment account offering that should appeal to buy-and-hold investors. Vanguard's biggest selling point is its lineup of commission-free ETFs. All of its own popular Vanguard ETFs can be traded free of any commissions. For most users, stock trades are $7 a trade. Users with less than $50,000 get 25 trades for $7 and then have to pay $20 for additional trades. Users with more than $500,000 get $2 trades, and users with more than $1,000,000 get 25 free trades a year, making this a great choice for the high net worth as well. The interface is not built for active traders, but it suffices for the needs of a long-term investor.
- Charles Schwab. The first entrant into the discount brokerage business, Schwab still has a compelling interface and set of research and educational tools, decent pricing ($8.95 per trade) and am improving selection of commission-free ETFs. The latter feature is why we recommend them to our subscribers: the Schwab brand of ETFs is now cost-competitive with Vanguard and iShares.
- Fidelity. While the website feels a bit bloated, Fidelity is unquestionably in excellent financial shape, so you know your money will be safe. At a $7.95 flat-rate, equity commissions are on the lower end of the range that most DBs charge, and 30 ETFs from iShares can be traded free of any commissions. Like ETrade, Fidelity does not charge an annual service fee for accounts. They also offer over 100 different “investor centers” that you can pop into in person, should the need arise.
- Share Builder. A unit of ING (now owned by Capital One), you can be pretty sure your money will be safe with Share Builder. Investors that are just starting or have low account balances might want to look here, as it is a clean site with several tools that make investing simple, and it offers an automatic investing plan that lets you dollar-cost average while paying only $4 a commission. Commissions for normal orders are $9.99.
- ETrade. Etrade was one of the early winners of the discount brokerage world, and it currently has 4.3 million customer accounts and $189 billion in assets. After a scare during the financial crisis, the company appears to be back on stable financial footing. At $9.99 or less per trade, commissions run a bit more than some low-cost providers, but the trading tools and customer service are ranked highly. The company also offers more in the way of retirement advice and guidance than most of its competitors. There are also no fees or minimums for IRA accounts, and a number of ETFs from Wisdom Tree and Global-X can be traded free of any commissions.
- Interactive Brokers. A great choice for a high turnover strategy, Interactive Brokers caters to professional investors and active traders. You can trade just about any market in the world at rock-bottom commissions. However this is not the most user-friendly site for beginners, and definitely does not provide the same hand-holding as an ETrade. There is also a $30 minimum on monthly commissions that you must meet, or you will pay the difference as a service charge.
Finally, a Few Recommendations
While any company listed here can be a good option, we can't help ourselves from making a few recommendations.
- If you are mostly looking for a place to house an IvyVest model portfolio, you have four good options: TD, Vanguard, Schwab and Fidelity. We would recommend sticking with TD or Vanguard unless you have a strong preference otherwise.
- If you plan to invest in ETFs for the most part and buy a stock every now and then, Vanguard still comes out on top, especially if you will invest more than $500,000 and qualify for the rock-bottom $2 rate.
- If you want to get into active trading and can stomach the $30 minimum monthly commissions, take a hard look at Interactive Brokers. Frankly, Vanugard may still be a viable option here, but the power, access, and tools of IB are second to none.
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