Building Wealth

The Only Broker You Should Be Using

It's not all talking babies when it comes to brokerage ads...

Any time you visit a financial website or watch financial news, you can't help but notice the ads. They usually have some kind of animation to catch your eye, and they often offer "free trades" if you'll sign up.

For example, right now on the Yahoo Finance homepage, I can see ads for TD Ameritrade and Scottrade... and when I click over to Nasdaq's website, I find a whole list of "featured brokers" in the sidebar.

And if you're just getting started with investing, all these ads and lists of brokers can feel overwhelming. If you make the wrong choice, you'll likely be overpaying for trades and maintenance fees for years.

But don't worry. Today, I'll tell you about your two primary broker options and what to look for...

At the most basic level, the role of a brokerage is to facilitate trades. Depending on the type of broker, it may also provide research and even advice. The more assistance the broker provides, the higher its commissions and fees.

When it comes to buying securities, you have two main broker options: full service or discount.

Full-service brokers work for firms like Merrill Lynch, Wells Fargo, and Edward Jones. They interact directly, person to person, with clients. They frequently call customers with buy and sell recommendations.

Full-service brokers can be useful if you need a lot of hand-holding. The problem is brokers who take care of everything also charge fees and commissions for that hand-holding. Those charges can add up to as much as 1%-2% of your assets every year.

Decades ago, almost every broker was full service. They charged enormous commissions. I used to pay $75 to put on trades of less than $5,000. That means I lost 3% just by entering the position (1.5% to buy and 1.5% to sell). And today, full-service broker commissions are still pricey – commissions on trades of 100 shares can run $25-$35.

The commissions may be worth it to you. But I generally don't recommend (nor do I use) full-service brokers... On top of the costs, many brokers lack critical experience trading securities. Many are newly graduated. Most have zero net worth.

Mostly, they're relaying advice that comes from headquarters. The big firms have a centralized "strategist" who generates investment ideas and shares them with the brokers at weekly meetings. The brokers and salesmen parrot the picks to clients.

I prefer to use discount brokers. You interact mainly with their websites. These brokers normally don't talk with you on the phone unless absolutely necessary. (And they charge more if you transact with them over the phone.)

In exchange for accepting less human contact and spoon-feeding, discount brokers lower your transaction costs considerably. The fees and charges are small, which means more money for you.

Most of them offer access to an array of worldwide markets and securities. Their services are easy to use and include education and research materials. I use these as a substitute for broker advice.

Every year, we rank seven online discount brokers in my Retirement Millionaire letter...

We use information from Barron's (my favorite weekly business newspaper), personal interviews, and actual trading experiences.

Then we break out several categories to evaluate the brokerages. We leave it up to you to decide which of these factors is more important. But the good news is that all seven of our ranked brokers do a good job. They all execute well, offer good prices, and provide reasonable amounts of research.

Again, you should know that we aren't compensated financially for mentioning any of these brokers. And while I can't include the full table here, I have included the websites and phone numbers for three of our seven ranked brokers as a starting point for your own research...

Broker Fees for Internet Stock Trades Phone Number
TD Ameritrade $9.99 800-454-9272
Fidelity Investments $7.95 800-343-3548
E*TRADE Securities $9.99 800-387-2331

In my full report, "The Retirement Guide to Buying Securities," I take a deeper look at seven discount brokers (including the three in the table above) that can help you get started. Retirement Millionaire subscribers can access it here. If you haven't signed up for Retirement Millionaire yet, click here to join.

Again, do not consider anything in this note a recommendation for any one firm. This is simply a list of brokerages that receive excellent ratings for customer service... some of which I have personally used and had good experiences with. You'll have to choose a brokerage that suits your needs.

Are you already using a discount broker, or are you using a full-service broker? Tell us your experiences at [email protected].

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