With Independence Day approaching, it might be time for you declare your independence from high fees and bad investing advice. Here are a few reasons to consider breaking free from your broker.
The grand old tradition
Brokerages today bear little resemblance to their counterparts a generation or two ago. In the old days (which have not yet ended for many Americans), investors had accounts at big-name "full-service" brokerages, where brokers they knew by name would personally guide them through the mysterious waters of the stock market. These brokers would occasionally recommend that their clients buy, sell, or hold a given stock. Customers would pay up for those recommendations, and for any transactions that resulted. The commission fee for a single buy or sell order could cost several hundred dollars. Ouch!
This all began to change when firms such as Charles Schwab
If your broker is helping you earn considerably more than you're being charged, then perhaps he's earning his keep. There are surely plenty of talented brokers out there who are looking out for your best interests.
Unfortunately, there are also plenty looking out for their own interests above all. In lots of financial-advisor settings, professionals will recommend investments to you that are either poorly chosen, or designed more to line their own pockets with commissions than offer you outstanding returns.
Look at mutual funds, for example. Over and over again, over various long periods, the majority of managed mutual funds fail, on average, to outperform the market's average return. In other words, instead of paying some Wall Street wizards to pick stocks for you in their mutual funds, you'd be better off investing in a simple S&P 500 index fund. You'll often end up with the same shares of big companies like ExxonMobil
What to do
Many of us simply need to take control of our financial futures. This could mean spending lots of time reading about investing and becoming a smart stock evaluator. It could also mean just investing in a simple index fund. (Learn more about them.)
Meanwhile, make sure that the brokerage you're using is the best one for your needs. Odds are that you can find a better brokerage for yourself, one that charges you less than you're paying or offers more of the services or protections you want. For example, if you want to be able to easily invest in a wide variety of mutual funds, research which brokerages offer the most choices. If you don't trade too often, don't place too much importance on a $7 commission versus a $12 one. A few minutes in our Broker Center may help you zero in on a better brokerage. This article on finding the right brokerage may be helpful, too. Some very reputable brokerages now charge commissions of $5 or less per trade. (Our comparison table can help you find them.)
Fools, we hold these truths to be self-evident: You don't need to be a genius to improve your portfolio's performance, and the best way to do so may involve casting off the shackles of your current brokerage.
Longtime Fool contributor Selena Maranjian owns shares of General Electric. For more about Selena, view her bio and her profile. Charles Schwab is a Stock Advisor pick. Try any one of our investing services free for 30 days. The Motley Fool isFools writing for Fools.