If you want to be a successful investor, choosing the right broker can make a huge difference to your returns. But many investors have the mistaken impression that they should stick with a single broker for all of their investments. In fact, taking the time to find the best deals from multiple brokers on the investments you need can not only save you thousands in fees over your lifetime but also make your finances a lot safer.
Fighting for your money
Listen to the brokerage companies, and you'll obviously get a one-sided message. Most brokers have worked hard to develop one-stop shopping experiences to give their customers just about everything they could want to do with their finances, from banking and financial planning to trading just about any kind of financial instrument you can think of. With competition from fee-only financial planners who offer perks ranging from help with financial aid forms to managing household maintenance needs, brokers prefer to grab as many assets as they can.
Moreover, a challenging environment has forced brokerage companies to work even harder to stay profitable. In E*TRADE Financial's (Nasdaq: ETFC) quarterly results from yesterday, the company said revenue fell nearly 13% on a 16% drop in net income. Trading activity and commissions were down from the year-ago quarter. And although Schwab (NYSE: SCHW) and TD AMERITRADE (Nasdaq: AMTD) don't have the same drag that E*TRADE has from its mortgage-loan portfolio from before the financial crisis, they're facing many of the same economic challenges, with low interest rates cutting income on brokerage account balances and overall investor malaise weighing on commission revenue.
Yet one part of the puzzle that doesn't fit is that many brokerage companies are seeing big boosts in new accounts. The combination of more accounts and less revenue suggests an encouraging conclusion: Customers aren't falling for the one-stop shop routine and are instead taking advantage of each brokerage company's strengths.
Take one issue that has become increasingly important over the last few years: commission-free ETFs. When Schwab became the first broker to offer its proprietary ETFs at no cost to trade, it wanted to establish a foothold as a new entrant in an already crowded marketplace for exchange-traded funds. The move certainly encouraged existing customers to keep more money at Schwab rather than buying other ETFs, and it even brought in some new customers who didn't count on competitors to follow suit.
But as more brokers started offering their own ETFs at no commission or making partnerships with well-established ETF managers like BlackRock's (NYSE: BLK) iShares or WisdomTree (Nasdaq: WETF) to offer their funds commission-free, customers no longer had to make investment decisions based on which broker they had picked. Rather, they could pick their broker based on investment decisions they had already made, pinpointing the ETFs they wanted and finding a broker that would deliver them at the cheapest cost.
It's easy to take that thinking further. If it takes two brokers to give you full exposure to your favorite ETFs, why not open two accounts? With online trading, it's only a tiny amount of additional hassle. And if you can double your commission savings, it's well worth the effort over the long haul, especially if you plan to make frequent transactions with those ETFs.
Going for safety
The futures brokerage scandals at MF Global and more recently Peregrine Futures, both of which resulted in missing customer funds, have reminded investors that they need to take steps to protect their money. Unlike investors in futures contracts, though, stock, bond, and mutual fund investors get protection from the Securities Investor Protection Corp. for up to $500,000 in assets.
Just as many savers who have money in bank accounts spread their assets around to ensure they have FDIC insurance coverage, safety-conscious investors also recognize the value of making sure they have SIPC coverage for their brokerage assets. Again, multiple accounts can mean the difference between being fully insured and being exposed to potential losses in the event of a catastrophic failure.
Be smart and save
The days when investors had a devoted professional relationship with their brokers are largely over. By watching out for yourself and getting the best of every broker out there, you can improve your results and save a bundle while you're doing it. That's a winning choice in any market environment.
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Do you need more help finding a broker that will do a better job of meeting your needs? Go to the Fool's Broker Center and learn more about the brokers that cater to investors like you.
Fool contributor Dan Caplinger hasn't been afraid to jettison bad brokers. He doesn't own shares of the companies mentioned in this article. You can follow him on Twitter @DanCaplinger. Motley Fool newsletter services have recommended buying shares of BlackRock, WisdomTree Investments, Schwab, and TD AMERITRADE, as well as writing puts on TD AMERITRADE. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy saves you time and money.