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How to Choose an Investment Account

Sept. 30, 2016
Brokers, Investing, Investing Strategy, IRA
How to Choose an Investment Account
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You’ve decided to open your first investment account. You compare commission costs and account minimums and — boom — mission accomplished. You’re ready to start investing in stocks. But then …

It could be anything, really: Surprise fees. Limited choice. An awkward interface. Or lousy customer service. One day you realize that the one-size-fits-most broker you’re using just isn’t a good fit.

You don’t have to settle for “almost right.” Some upfront financial self-analysis will steer your search for the right brokerage account.

If you already have an idea …

We’ve done extensive research into the top brokers, selecting the best for different types of investors, including:

Investor, know thyself (and your broker, too)

Let’s talk about your needs — specifically, what you should consider when shopping for your first investment account:

  • How much money you have. The type of account can dictate the minimum a broker requires to even open an account.
  • What types of assets you intend to buy. Individual stocks are standard fare. Exchange-traded and mutual funds are, too, but selection can vary widely. Check a broker’s lineup if you have a specific investment in mind.
  • How frequently (or not) you plan to transact. Buy-and-hold investors can put commission costs lower on the priority list than can active investors.
  • The level of service you need. First-time investors should consider the availability of educational tools, investment guidance, stock-trading research and access to real-life humans.
  • How well you and the broker “click.” The broker’s platform and reporting style should be intuitive and easy to navigate.

Misalignment on any of the above can quickly turn the broker-investor relationship sour. To avoid any future unpleasantries, try to identify potential problems before you commit to an online broker.

Here’s what to look for.

How much is required upfront?

A broker’s entry fee may depend on the type of account you’re opening. A $500 to $2,500 minimum for a regular account (aka, non-retirement) is not uncommon. However, the bar is often set a lot lower (as in a $0 minimum) when opening a retirement account, such as a traditional IRA or a Roth IRA. Some brokers waive the initial deposit requirement for customers who sign up for automatic monthly deposits.

Tip: If the initial balance requirement is the only thing standing between you and brokers that fit all of your other criteria, it may be worthwhile to postpone your investing start date until you’ve amassed enough to open an account.

» MORE: Best brokers for IRAs

Is there an investment minimum?

Paying the cover charge gets you in the broker’s front door. To move beyond the foyer, you must meet its initial investment minimum.

For stock investors, calculating the minimum required investment is easy enough: You have to pay the share price plus the commission. Same for ETF investors. It’s trickier with mutual funds, where a minimum initial investment requirement can run as high as $1,500 to $2,000, depending on the fund. That said, after meeting the fund minimum for your initial contribution, additional investments at lower dollar amounts are allowed.

Tip: If after calculating the investing costs and minimum requirements it turns out that your first choice is financially out of reach, don’t just walk away. It’s better to start investing something now (and get compound interest rolling) with a broker that fits your current and near-future financial reality than to put it off for too long.

What are the trading costs?

Buy-and-hold investors can afford to pay a bit more for commissions in exchange for access to other features they value more. That said, when you’re just starting out and building up a diversified portfolio of stocks, plan for higher trading costs upfront as you seed your account. After you’ve established your positions, the impact of commissions will dwindle.

Low commission costs are more important to those who plan on trading frequently (10 or more trades per month) on an ongoing basis. Placing 10 trades a month at $9.99 apiece adds up to $1,198.80 a year in commissions. At $4.99 per trade the annual tab is $598.80 — but you may “pay” for the difference elsewhere: Some deep-discount brokers may not offer research tools or robust customer support. Completely free trading apps are bare-bones services where dividends aren’t automatically reinvested and only taxable accounts (not IRAs) are supported.

There are other fees to consider, too: Annual or quarterly IRA administrative fees (for not maintaining a certain account balance or setting up auto-deposits), inactivity fees (for not placing a minimum number of trades during a specified period), add-on fees for data or premium reports ($5 a month to hundreds of dollars for premium reports), trading platform fees (mainly by brokers catering to options investors and futures and commodities traders).

Tip: Sign-up bonuses are a great workaround for investors who don’t want their initial deposit eaten up by commissions. Many brokers offer pretty sweet deals, like a bunch of commission-free trades or cash bonuses/account credits for opening a new account. The value of the sign-up bonus may be based on the initial investment amount or require customers to set up automatic monthly deposits. Finally, don’t be blinded by a pretty bonus: It’s what’s inside that counts for the long term. Make sure the broker will still be a good fit after the promotion period ends.

» MORE: This year’s best online brokers

Can you get the help you seek?

Customer service can be a lifesaver — and money-saver — for beginner investors. The simple act of clicking “buy” for the first time can be fraught with anxiety if you’re not sure you’re doing it right. All the research and tools on the planet are worthless if you don’t know how to use them. (See our steps for buying a stock to understand the fundamentals of the process.)

Consider what level of service and guidance you want, and check whether there’s a cost to getting the support you think you’ll need. For example, broker-assisted trades can cost from $10 to $45. Some companies offer only phone and email support.

Tip: Client support can be delivered in a number of ways: FAQs, video tutorials, real-time chat, email, one-on-one in-person advice. Some of the bigger brokerages have physical branches where customers can schedule consultations and attend local seminars and investor meet-and-greets. Before you become a customer, stop into one of the branches and have a representative walk you through a test-drive of the broker’s trading platform.

How easy is it to quit?

Your first investment account doesn’t have to be your “forever” broker. It happens: Maybe you thought you’d trade stocks but then decided that index investing is more your speed. Or you couldn’t afford the investment minimum of your first-choice broker and later became flush enough to switch. Or perhaps after a year of training-wheels trading you’re ready to graduate to a more sophisticated investing strategy that’s costlier to execute at the broker you chose in your newbie days.

This first account may turn into the investing equivalent of a starter marriage. Only less depressing … and — bright side! — the uncoupling costs are lower, too.

If you know you’re going to be moving on in the not-too-distant future, do some upfront research into account transfer and liquidation fees. These can range from $20 for a partial transfer to $75 for a full transfer, and the amount is often based on account type, where moving IRA money is cheaper than transferring out of a regular taxable brokerage account.

» JUMP BACK: Revisit our picks of the best brokers
» MORE: Use our tool to find the best broker

Tip: Let your next broker pick up the tab for transferring your account. All brokers will assist you in making a transfer, and some will even fully or partially reimburse your transfer fees.

Dayana Yochim is a former NerdWallet authority on retirement and investing. Her work has been featured by Forbes, Real Simple, USA Today, Woman’s Day and The Associated Press.