For some individual investors, it's the bane of their existence. For others, it's a priceless wealth-building tool, an essential key to their investing strategy.
What is it? It's your broker, the company that connects your money to the global markets. While many of us think of brokerage services as a commodity -- whatever, just give me the cheapest option -- the truth is, a well-chosen broker can provide you with critical tools and insights that fit your approach to investing and greatly improve your chances of building big wealth over time.
And a bad broker? Ugh. I probably don't need to explain that one. But even a "good" brokerage that's the wrong fit for you and your investment style can end up costing you time and money -- sometimes big money -- if you're missing key investing opportunities because you and your broker aren't on the same page.
So how do we find the right one? I'm glad you asked.
Looking past the fees
This month, SmartMoney released its highly regarded annual rankings of discount and full-service brokers. As they do every year, the folks there compared discount brokers on their trading tools, access to mutual funds and investment products, investment research, banking services, customer service, and (of course) commissions and fees.
And the results? While the magazine provided an overall ranking for each of the major discount brokerages, I think the real value of the rankings comes from looking past the overall results at the specifics that are most important to your investing style and needs.
For instance, many folks depend on their broker for education and research tools to help them find the non-obvious investments that are key to beating the market over time. If you're one of these people, it's especially important that you choose your broker carefully. All brokers have "research tools," but these can range from simple stock screeners, to detailed reports from research firms like Standard & Poor's and Lipper, to complex bond- and option screening and evaluation tools.
And "education" can range from a few online how-to guides to in-depth seminars held in a firm's branches. Think about your needs: What will help you make better investment decisions? Detailed reports on companies? Education on different types of investments, like bonds or ETFs or options? Sophisticated screeners?
Overall rankings winner Fidelity, as well as Charles Schwab (NYSE: SCHW) and E*TRADE (Nasdaq: ETFC), all earned high marks in this category, but look under the hood: E*TRADE was lauded for the depth and flexibility of its online content, whereas Schwab got props for its in-person seminars. Again, ask: What do you most need to improve your portfolio's returns -- or maybe just your ability to sleep at night?
But if you insist on keeping it cheap
But what if you do your research elsewhere, like here at the Fool? What if you don't need all the bells and whistles? If you just want the lowest fees, look to Scottrade and ShareBuilder. Even though ShareBuilder got low marks from SmartMoney on research, that's not important if you would never use it anyway.
Similarly, if a bit more in-person contact suits your style, Scottrade and its 500-plus branches may be a better fit. But frequent traders may not like the broker's trading tools. Generally speaking, the cheapest brokers didn't fare as well in most of the rankings as the more "premium" services like Schwab and Fidelity -- and the price differences weren't enormous.
You get what you pay for, except when you don't
For most investors, paying a little more for services seems to make sense, assuming you'll actually use them. So what about paying even more for an old-school full service broker? As a big advocate of do-it-yourself investing, I tend to take a dim view of full-service brokers, which sometimes seem to charge an awful lot for results that lag an index fund. That said, many folks who lack the time or inclination to manage their portfolios on their own find their full-service brokers to be valuable wealth-building allies.
The best full-service brokers -- SmartMoney likes Raymond James (NYSE: RJF) and Edward Jones -- offer solid investment recommendations together with top-notch customer service, with an emphasis on long-term personal relationships. One caveat: Many of the companies in this space, including Bank of America's (NYSE: BAC) Merrill Lynch and the brokerage unit of Wells Fargo (NYSE: WFC), are still working out the bugs from the abrupt mergers-of-giants that came about during the financial crisis of 2008. That means website and statement integration (among other things) may be spotty for a while, so again, shop carefully.
Here's the takeaway: Finding the broker that's best at the things you value can pay off big in the long run. Need education and research? Try Schwab or Fidelity, or consider a full-service firm for extra handholding. Do a lot of trading? E*TRADE, TD AMERITRADE (Nasdaq: AMTD), and Fidelity got top marks, and of course optionsXpress (Nasdaq: OXPS) built its rep as an options-trading platform, though it lagged in other areas of the ratings. Price-conscious? Check out Scottrade, or consider Vanguard's discount brokerage, which is short on most frills but has solid research tools -- and as you'd expect, a big selection of mutual funds.
But think it through, and make your choice deliberately after spending some time poking around the company's website. Personally, I only trade a few times a month at most, so saving a buck or two per trade isn't that important to me. But I do a lot of research, and I'm willing to pay a bit more per trade for a broker (Fidelity, in my case) that offers solid research tools and information. What are your needs? A little time spent researching can make a big difference in your investing success over the long run.
Ready to find the best broker for your money? Start your search at the Fool's Discount Broker Center.