When you compare online brokers, it’s easy to be overwhelmed with all the choices and options. It’s easy to be drawn in and distracted by promotions and added features. But is it really a deal?
These days every broker offers similar features and competitive pricing. Still, not all online brokers are the same. Some specialize in specific assets, account types, or advanced trading systems.
Make sure you are comparing apples to apples when it comes to your money. Before you make that first deposit, here are a few important things to consider when you compare online brokers.
Ask Yourself These Questions
Before you do anything, answer these questions:
- What type of account are you opening?
- What do you want to invest in?
- What type of investor are you?
Each account type might have different fees or requirements. Some brokers might charge an annual fee, depending on the account. You might find different funding or minimum balance requirements between account types. Other brokers might not even offer the account you want. Save yourself some time by eliminating those brokers immediately.
If I asked what type of investor are you, how would answer? Are you passive or active, a trader, or buy and hold? Are you planning on sitting in front of four computer screens all day tracking dozens of stocks? Or are you planning on owning mutual funds and making regular monthly deposits? This all matters.
Almost every online broker can handle the monthly deposits. But they don’t all have the trading tools to hack it for day traders. Do the research and find a broker that has the trading system you need.
Different online brokers specialize in different assets. It’s best to choose a broker that offers the best opportunity for you to succeed. But if they don’t offer enough choices, it’s useless. One broker may specialize in options, but only offer a dozen mutual fund or ETF choices. There are even online brokers that offer free transactions for certain assets, like ETFs. Be wary, sometimes the choices are limited or have time constraints. Reviewing the trading costs for each asset is a great place to start.
Compare Online Broker Costs
Those fees will kill you. So will transaction costs. This might seem obvious but check all the hidden fees that might impact you. If you don’t know by now, costs will eat into your investment gains. The higher the costs, the more money you need to make just to break even. You should try to keep costs to a minimum without losing any extra services or features you want from an online broker. When you compare online brokers these are a few areas where hidden costs or savings can be found:
- DRIPs – First, every broker should offer a DRIP (dividend reinvestment plan). If you plan on reinvesting dividends, you shouldn’t be charged for it. This is one of the easiest ways to grow your money at no cost. Dividend reinvestment is compounding at it’s best. If the broker doesn’t offer free DRIPs, take a pass.
- Account Balance Minimums – For the most part, minimum balances are gone. It’s always good to double-check. Certain account types may carry a balance requirement. Some brokers even offer discounted trades or added services if you maintain a specific balance.
- Inactivity Fees or Trade Minimums – Who knew you could get charged for not doing anything. Brokers make money when you trade. Some even require a minimum number of transactions per month, quarter or year. This can be costly.
- Automatic Investments – If you prefer to set regular automatic deposits, you should be able to schedule automatic investment of those funds. Some brokers may even lower or drop the costs when you do.
- Assisted Trades – The advertised trading costs are for online trades only. Most brokers offer assisted trades through an automated telephone system or broker-assisted at a higher cost. Know how much it will cost you before you pick up the phone.
- Transfer Fees – Nothing is more annoying than switching brokers only to find out it will cost you $150 to leave. It doesn’t make sense, but that seems to be the going rate for some online brokers. You may be able to refund some or all of those transfer fees if the broker you switch to offers transfer reimbursement. Of course, if you choose the right broker, you’ll never need to switch.
Costs are not the only thing to consider when comparing online brokers. Sacrificing on some costs or fees might be worth it for better customer service, reliability, reporting, and trading tools.
It’s pretty straight forward, but great customer service matters. Especially when it’s about your money. Customer service should be responsive and easily accessible. The ability to walk someone through a trade over the phone is just as important as answering questions about a certain mutual fund. Both should be concise, to the point and helpful. If not, it’s time to look somewhere else.
How reliable is the trading system? Account access is important. When a trade doesn’t go through because the system is down or you can’t even log in, the first thought is to move to another broker. It could cost you extra losses or lost gains. Either way it’s bad. A reputable broker shouldn’t have these issues. The broker must be reliable.
New cost basis reporting standards have been put into place over the past several years requiring brokers to track cost basis on purchases and sales of securities. But that’s were it ends. The quality of those reports could be terrible.
When tax time rolls around, being able to use those reports with your accounting or tax software is a big help. Are those reports available for the life of your account or a fixed time and can you transfer those cost basis reports to another broker if you move your account?
If the cost basis is a mess, it’s harder to figure out your gains and losses for the year. If you don’t like doing your taxes now, this only makes it worse. Any good online broker will have everything squared away neatly and will keep records for every year too.
Those Great Promotions
Promotions are meant to grab your attention and pull you in. Free trades and money sound great. Is it worth it? Maybe, but read the fine print. How much do you have to deposit to get the deal? How long do those free trades last? Is that extra $50 or $100 really worth it once you add up all the costs. Some broker promotions are worth it, but do some digging before you bite on anything.
What Do You Need From The Broker?
Base your final decision on your needs. Everyone has different requirements. These are some of the more important things to consider when you compare online brokers. Eventually, you should find a broker that fits you best.