A brokerage firm buys and sells stocks, bonds, options and other financial products on behalf of clients. Many brokerages hire individual brokers as a way to pool resources and offer the best service. In addition, many financial services companies also have brokerage houses as part of their broader services.
Finding the right brokerage firm can be an important piece of any successful financial plan. Read on to learn about what a brokerage firm is, what it can do for you, and what you should look for when selecting a broker.
What Does a Brokerage Firm Do?
A brokerage firm acts as an intermediary between buyers and sellers of securities and other financial instruments. As a customer, you will typically tell the broker which stocks to trade and when to trade them. In some cases, brokerage firms go beyond the standard intermediary role by providing advice on which stocks to buy and sell, what the risks are, and how certain trades can affect your investment portfolio.
Brokerage firms usually have several individual brokers on staff to assist clients. Without a broker, you have very limited options for purchasing stocks, so you’ll need a broker to help you procure investments. A broker is an individual with the appropriate training and licenses to help you buy and sell stocks, bonds and mutual funds. Brokers work closely with clients to ensure they choose investments that meet their needs.
How Does a Brokerage Firm Work?
A brokerage communicates with stock exchanges to execute the trades you want. In exchange for these services, you will be charged a brokerage fee. This is usually on a per-trade basis, though some brokerage firms charge annual account maintenance fees.
The process typically involves opening a brokerage account, in which you’ll provide standard information such as your name, contact info and bank information. Most brokerages let you open an account online, though in some cases you can visit a branch office to open an account in person. You can also decide which type of account to open. Choices might include nonretirement accounts, retirement accounts, college savings accounts and health savings accounts.
The next step is to fund the account using a bank transfer, check or transfer of assets from another brokerage firm. After that, you can choose the type of investment, such as stocks, bonds, mutual funds and exchange-traded funds.
Different types of brokerages are available, so you should carefully consider which type best fits your needs. Keep reading to learn more.
What Is a Full-Service Brokerage Firm?
Full-service brokerages provide more than just the basics. They not only execute trades for you, but also provide a range of other services, which might include tax planning, research, investment advice, and estate and retirement planning. A full-service brokerage will typically have a dedicated broker who can meet with you in person and provide personalized advice based on your specific circumstances.
Because of the added services they offer, most traditional full-service brokerages charge a fee, commission or both. For regular stock orders, you might be charged up to $20 per trade, though many brokers have adopted a model where you pay an all-inclusive annual fee for all services. This is usually around 1% to 2% of assets under management.
Even the best full-service brokerage might ultimately fail to create enough value in the other services it offers to make up for the fees it charges, which can add up considerably over time. On the other hand, there are many ways a good full-service brokerage can save you money over time. This usually comes in the form of helping you lower your taxes or make the right investments. It’s important to consider just how complex your investment portfolio is or will be, and whether the additional services you get with a full-service brokerage are worth it.
Some of the top full-service brokerage firms include Edward Jones, Stifel, Fidelity, RBC and UBS.
What Is a Discount Brokerage Firm?
A discount brokerage is a stripped-down, bare-bones version of a full-service brokerage that usually doesn’t do much beyond executing trades. This might mean you’re not getting a dedicated team of professionals helping you understand how you can grow your wealth. However, you’ll often pay a lower brokerage fee for this service — typically a flat, per-trade fee.
Most online brokerages are of the discount variety, giving you a simple, direct way to make investments at the lowest possible cost. You can save a considerable amount on fees by opting for a low-cost discount brokerage and taking a DIY approach to investing, but you will be losing advice and planning from a team of professionals. If you have a smaller account or intend to make simple, straightforward investments, a discount brokerage might be right for you.
Leading names in the discount brokerage field include TD Ameritrade, M1 Finance, Interactive Brokers, Robinhood and E-Trade.
What Is a Robo-Advisor?
A robo-advisor is an app or website that creates an investment portfolio for you based on your financial goals. You typically don’t interact with a person — everything is automated. Since few people are involved, the fees are typically very low.
Each robo-advisor works a bit differently. With some, you might be able to ask investment questions via chat or email. With others, you may have no communication at all with an investment professional. However, most provide educational resources so you can make an informed decision.
Leading robo-advisors include Betterment, Wealthfront, Vanguard Digital Advisor, Ally Invest, Acorns and Wealthsimple.
Independent vs. Captive Brokerage: What’s the Difference?
Brokers don’t just belong in the investing world. You can also find brokers when you shop for insurance. When working with insurance brokers there are two main types of agents: independent and captive. Here’s a quick rundown on each.
Independent agents, also known as individual agents, work with multiple insurance companies rather than being tied to a single company. Indie agents have contracts with these companies and are approved to offer their products. You might be charged a fee by some independent agents.
Captive agents represent only one insurance company, which means many of them have a deep knowledge of the products and services that the company offers. Captive agents might also have relationships with underwriters and corporate employees since they work with the same insurance company.
The Bottom Line
Choosing the right brokerage firm depends partly on what your needs are, and partly on how much wealth you have amassed. Customers who have built up considerable wealth over time might prefer the hands-on approach of full-service brokerages, which provide professional advisors to help you make the right investment decisions and come up with a good retirement plan. Just keep in mind that you can expect to pay fees and commissions with most traditional brokerage firms.
If you don’t have a lot of money to invest (or to pay in fees and commissions), you’re better off going with a less expensive discount broker. And if you are a self-starter with knowledge of the stock markets and a high comfort level with digital transactions, a robo-advisor might be the best option.
Vance Cariaga contributed to the reporting for this article.
This article has been updated with additional reporting since its original publication.