comparing investment platforms and brokers

In short

A friend of mine once spent three weeks picking a brokerage and then left his money sitting in cash for another month. If you are weighing platforms right now, you are probably in the same boat, and I want to ease your mind a little. Most of the choice comes down to what each firm charges and what each firm lets you hold. Look at the fee schedule first, because it is public and the firm must publish it. Check that the firm is registered, which takes about five minutes on a free government tool. Then match the account types to your goal, whether that is a taxable account, an IRA, or both. Pick one that fits, open it, and get on with your life.

The whole of it

What it is

I once watched a neighbor argue with a car salesman for two hours over floor mats, then sign a loan without reading it. People do that with money all the time, and it is no sign of a flaw in your thinking. We simply tend to haggle over small things and skip the big ones.

A brokerage is a firm that holds your account and carries out your orders to buy and sell. Think of it as the gas station and not the car. The firm does not decide what you hold. It gives you the place to hold it and the means to trade it. Some brokers are online only. Some have branch offices and phone lines. Some are robo advisors, which are services that pick and rebalance a mix of funds for you by computer, for a fee.

A platform is the app or website you use to see your account. Two firms can offer the same funds and feel nothing alike to use. That feel matters more than people admit, because a tool you dislike is a tool you stop opening.

How it works

If you are holding a little money and a lot of questions, here is the plain picture. You open an account, you send money in from your bank, and you place an order. The broker routes that order to a market and then records the result in your account. The broker earns its living in a few ways. Some charge a commission on each trade. Many charge $0 for common trades and earn money other ways, such as interest on the cash you leave idle, fees on certain funds, or payment for sending your orders to particular trading firms. A flat advisory fee, charged as a percent of your balance each year, is common with robo advisors and human advisors.

Every fund also carries its own yearly cost, called an expense ratio. That is a percent of your balance the fund takes out to pay for running it. It is not billed to you as a separate line. It is just taken from the fund's value. A fund charging 0.50 percent costs $5 a year for every $1,000 held.

The account type is separate from the broker. A taxable account has no special tax rules. An IRA, short for individual retirement account, gets tax treatment set by law. Most brokers offer both, but not every firm offers every kind, so check that before you commit.

The numbers, and where to find yours

Here is what to look up, and where. The yearly limit for putting money into an IRA is set by law and changes. For the current figure, see the current figure, which the official source publishes each year. The extra amount allowed for people past a certain age is the current figure, which the official source publishes each year for those who qualify, and the age that triggers it is the current figure, which the official source publishes each year. These come from the IRS, which posts them on its website each year.

For the broker itself, find the fee schedule. Most firms keep a page called pricing or fees. Look for the commission on stock and fund trades, any account maintenance or inactivity fee, the fee to transfer your account out, and the rate paid on idle cash. Ask what the firm charges for its own advisory service, if you want one.

To check registration, use the tools from the Financial Industry Regulatory Authority, called FINRA BrokerCheck, and the Securities and Exchange Commission's Investor.gov search for advisers. Both are free. They show whether a firm or person is registered and whether there are disciplinary records. Also look at coverage from the Securities Investor Protection Corporation, called SIPC. SIPC protects customers if a member firm fails and assets are missing. It does not protect against a loss from the market going down. Read the SIPC page to see exactly what it covers and its stated limits.

A worked example

Let me tell you about a woman I will call Denise. She is 34, earns $52,000 a year, and has $6,000 saved to invest. She is choosing between two firms.

Firm A charges $0 per trade and has no account fee. It pays 0.50 percent a year on idle cash. Denise plans to buy a broad fund with an expense ratio of 0.05 percent.

Firm B is a robo advisor. It charges an advisory fee of 0.25 percent a year and puts her in funds whose own expense ratios average 0.10 percent.

Let us price a year at each, assuming she invests the whole $6,000 and the balance stays flat to keep the math plain.

At Firm A, the fund cost is 0.05 percent of $6,000. That is $6,000 times 0.0005, which is $3 a year. The firm fee is $0. Total cost is $3 a year.

At Firm B, the advisory fee is 0.25 percent of $6,000. That is $6,000 times 0.0025, which is $15. The fund cost is 0.10 percent of $6,000, which is $6,000 times 0.001, or $6. Total cost is $15 plus $6, which is $21 a year.

The gap is $21 minus $3, or $18 a year. Eighteen dollars is small. Over many years it grows, since the fee is taken from a balance that is itself growing. But Firm B does the choosing and rebalancing for her. If she would otherwise freeze up or tinker, that service may be worth the $18 to her. If she is happy to pick one fund and leave it, Firm A costs less.

Notice that I did not tell Denise what to buy. The numbers just show her what each path costs, so she can weigh it against what she wants.

Where it goes wrong

I have seen smart, careful people trip on the same few things. Fees hide in places you do not look. The commission may be $0 while the cash rate is poor, so the firm earns its money on your idle balance. Read the cash rate, not just the trade price.

Another trap is a bonus. A firm may offer a cash gift for moving a large sum. Read the terms. The firm may require the money to stay for a set time, or may charge a fee if it leaves early. A bonus can be fine, but it should not be the whole reason to pick a firm.

Watch for a transfer fee too. Some firms charge to move your account away. That fee is small next to a large balance, but it is good to know before you sign. Also remember that the account type matters as much as the firm. Putting money in a taxable account when an IRA would have fit your goal can cost you tax breaks that law gives only to certain accounts.

And watch for the pull of speed. Fast trading tools and bright alerts can make trading feel like a game. That is a sales feeling, and it can lead to more trades and more costs. Slow is fine here. Slow is good.

Last, be careful about who is advising you. A broker who sells you products may be paid when you buy. An adviser who charges a flat fee has a different pay setup. Neither is wrong, but the reader should know which is which. Ask how the person is paid, and look the person up on BrokerCheck or Investor.gov.

Questions to answer before you leave this page

What am I trying to do with this money, and how soon might I need it? Do I want a firm that picks and rebalances for me, or am I fine choosing a fund and leaving it alone? Have I read the full fee schedule, including the cash rate, the transfer out fee, and any inactivity charge? Did I look up the firm on FINRA BrokerCheck and Investor.gov, and did I read what SIPC does and does not cover? Does the firm offer the account type I want, whether that is a taxable account, an IRA, or both? Have I checked the current IRA limits at the current figure, which the official source publishes each year so I know how much I can put in this year? If a bonus is on offer, did I read the terms for any required holding time? And when I picture opening this account tonight, do I feel steady about it, or am I rushing?