Do Name Brands Matter with Brokers?

It is more important to have a broker who is expert at what he or she does than to have someone who is affiliated with a national wirehouse like Merrill Lynch, Morgan Stanley, or the other big names.

Yes, the big names have access to their own big stable of researchers and may sell exclusive products, but there are few other operational differences. Moreover, both the brand-name houses and the boutique brokerage firms have their own cases of "selling pressures," where brokers feel management's push to reach certain sales quotas.

Additional research is important, but you want a broker who does his or her own research, rather than relying solely on the firm's reports.
In fact, you want a broker who is unafraid to do things that are out of step with the firm, advising you to stay away from industries or companies that she is nervous about, even if the brokerage house analysts are on television or in the papers talking those stocks up.

Smart Investor Tip

You want a broker who does his or her own research, rather than relying solely on the firm's reports.

Finally, the bigger firms typically have programs that try out a crush of newbies, trying to see who can hack it in the business and who is better off finding a different profession. The advisor who calls on you from a big firm may be the latest recruit trying to build a clientele; the experience of the broker in the office matters more than the name of the brokerage firm above the office door.

Picking an Online Broker

If you don't need the counsel and guidance of a broker to buy stocks and funds -- or if you have hired a financial planner for advice but it's left for you to execute the trades -- you probably want to forget about picking the right person and look instead at picking the right online brokerage firm.

Unlike the interviews you do with real people, the selection process for an online broker is an "interview" that typically involves reading the frequently asked questions from the firm's website and maybe having a discussion with a customer-service representative.

But because this is a do-it-yourself kind of business, you need to know your plans in order to find the right fit. Frequent traders have different needs than buy-and-hold investors; savvy investors need less hand-holding than newbies. Match your needs to what the firm offers. Here are your key considerations:
  • Commission costs. Commissions vary by the frequency of trades, number of shares, and even price of the shares. Plenty of firms offer a certain number of free trades, although they may require that you open a bank or money-market account with a minimum balance to get those no-cost transactions. There can be a huge jump in costs if a broker is required to execute the trade. The lowest cost provider may not be the one with the ads screaming about cheap trades, it will be the one where its system best meshes with your expected account activity.
  • Trading/investing pattern. Try to put your trading/investing pattern into the cost grid from the online broker; the one advertising the cheapest trades may not actually be cheapest for you.
  • Hidden costs. Commissions are just one part of the equation. If there are fees for delivery of stock certificates, for transfers, for wired payments, for annual "account maintenance," and even for terminating your account, you may wind up an unhappy camper. The firm with the lowest trade commissions may not be cheapest if it nickels and dimes you all the time.
  • Trading capabilities. Most online firms can serve most online customers. Make sure you fall into that category. You're outside the norm if you are frequently trading penny stocks, options, futures contracts, foreign currencies, bonds, foreign securities, and more. If you can't handle all of your business with the firm, you may want to look elsewhere.
  • Real-time abilities. This was a big-time selling point in the past, but it's par for the course now. If a firm is bragging about its real-time abilities now, it's kind of like a shopping center bragging that it has indoor plumbing. It's nice, but not much of a selling point. However, if rapid trading is important to you, you will want the most live action you can get; make sure the firm can deliver.
  • Support. Ask online traders for their biggest beef about brokerage firms and the most common answer will have to do with how the firm responds to questions and complaints. Yet the amount of support you receive should be pretty well spelled out by the firm in advance. If you go for the ultra-low-cost trades, you can expect virtually no hand-holding whatsoever. Find out the support levels that come with basic service and know who to contact if there is a problem or dispute.
  • Account minimums. Some firms have no minimum investment to open and maintain an account, while others have clearly defined levels and charge fees when you fall below the specified target. Depending on your means, a big investment requirement can be off-putting.
  • Sweeps and money-market features. Most online brokerage firms have money-market accounts, which is where new deposits -- plus any dividends or money received from the sale of your stocks -- sits while awaiting your next instructions. Find out if the firm automatically sweeps idle money -- such as dividend payments -- into your money-market account at the end of the day. (If it waits longer, you are losing interest on that money.) Find out what the firm's money-market account pays in interest, and whether you must use the house fund or if you can pick one on your own. Inquire about check-writing privileges and fees, too.
  • Research and other goodies. Consumer research firm J.D. Power & Associates says customers rank decent research ahead of things like trade execution and customer service in determining their overall satisfaction. Each brokerage firm has its own resources and access to other providers, too. At some, everything is free; at others, certain services come with a cost. Check out an online broker's tools -- like portfolio planners, stock screeners, and the like -- and compare between sites to find the tools you find most helpful and easy to use.
  • Crash protection. We're not talking stock market crash here, as there is nothing any brokerage firm can do to help you then. System crashes are another matter altogether. Find out what a broker will do someday when an emergency strikes. Will you be working by telephone or have a personal contact? These problems are few and far between, but you'd like to know what happens if you get blitzed by one.
  • Easy navigation and your gut feeling. As with a traditional broker, once you sort through the details, it's still going to come down to where you feel most comfortable and which service you like the best. Remember, too, that with online brokerage firms there is seldom a drawback to having accounts at two different firms; if it doesn't promote confusion and make your accounting difficult -- and if you have an affinity for the offerings and niceties at two different firms -- you may opt to get the best of both worlds.
By Chuck Jaffe
Chuck Jaffe is a senior columnist and host of two weekly podcasts at MarkWatch. He has also been a guest speaker on several television and radio shows.

Copyrighted 2016. Content published with author's permission.

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