This article was updated on April 8, 2016.
Whether you're just starting to invest for the first time, or have a seven-figure (or more) portfolio, picking the best investment company is an important step. Not only is it critical that you get the best price for the services you intend to use, but it's just as important that you have the kinds of access and support that you need, while also not paying for things that you don't need.
Let's take a closer look at some of the most important things you need to consider when picking an investment company.
Full service advisory: Are you sure you're getting unbiased advice?
We Fools encourage people to be as hands-on with their investing as possible; but the reality is, not everyone is willing or able to commit the time and effort to do so. If you're looking for a financial investment advisor, you should know a few very important things, such as:
- How are they paid: commissions, fees, or both?
- Are they held to a fiduciary -- must act in your best interest -- or suitability -- which allows for conflicts of interest -- standard of ethics?
- Can you pick any investment product, or are you limited to what the company offers?
The unfortunate reality is, most financial advisors, and the investment companies they work for, may not have any legal obligation to recommend you -- or even offer you -- the best available product. It may sound crazy, but an advisor who operates under the "suitability" standard can offer you a product that pays them a higher commission rather than a competing offering, even if the competing offering has historically had better returns.
If you're looking for the highest level of ethical standard, insist on a fiduciary standard, such as that held by Certified Financial Planners.
It's also important that you have a solid understanding of how your advisor is paid. If you're not paying your advisor upfront, rest assured that his or her income will be a result of the products recommended to you.
That's not necessarily a bad thing, but it's pretty important to know if that's the case. It's also important to note that even non-commissioned advisors aren't automatically operating under a fiduciary standard. For example, if an advisor works for a company that only offers limited, in-house investment options, you may not have access to the best available choices.
In short, it's best to work with an advisor who has a fee structure that's easy to understand, and is based on deliverables he or she will provide to you, such as a comprehensive investment plan based on your long- and short-term goals, as well as support and recommendations on how you'll achieve that plan. You'll typically pay upfront for this kind of service, but you're more likely to get advice with less bias if you pay for it versus counting on someone acting in your best interest if he or she doesn't have to, especially if that person only gets paid when you buy something.
The U.S. Department of Labor just issued new rules that require anyone advising clients on their retirement assets to meet the fiduciary standard as well as a number of very positive things about how they can be paid, but note a couple of important things about these new rules:
- They won't be in full effect until 2017.
- The fiduciary standard only applies to retirement accounts, not other investments.
Bottom line: Don't assume your advisor or broker is required to act in your best interest.
Just looking for a broker? Think about these things
If you're looking for an online broker, the most important three things you need to consider are:
- How much are fees?
- Can you make the kinds of trades you want to make?
- Can you invest in what you want?
- What kinds of accounts are available, and what are the balance minimums?
Let's take a look at each of these items.
Fees can make all the difference in your returns
At the end of the day, online discount brokers largely do the exact same thing: They facilitate access to the markets. However, different brokers can charge significantly more for the exact same service. Even the cheapest brokers can come with hooks, like requiring a minimum amount of monthly activity to avoid extra fees. In many cases, these fees can make the cheapest broker about the same price as a slightly more expensive online broker, especially if you're only investing a few times per month.
In short, read the fine print and know what you're paying. A few extra bucks here and there may not seem like much, but when you stretch it out over 20, 30, or 40 years, it can be tens of thousands of dollars in lost returns.
A $10 per month fee you pay for a few years until your balance gets above the minimum isn't just $360 down the drain. If you start paying that fee at age 25, you've lost 40 years of compounding growth. At 65, that $350 would be worth $16,000 based on the historical returns of the stock market:
Again -- understand the costs, and remember, it's not just the dollars you pay, but the lost returns that really matter. Start comparing online brokers here.
Can you buy what you want?
If you're just looking to buy stocks, ETFs, or mutual funds, most online brokers should work fine. But if you're looking to execute certain kinds of options trades, invest in bonds, or an international stock market, the choices narrow.
Don't just assume all brokers offer the services you want. Verify that it's available -- you'll save yourself time and money by taking the extra time to make sure you get what you expect and want.
Same goes with account types
There are a multitude of account types out there:
- Traditional IRA (sometimes marketed as "rollover IRA")
- Roth IRA
- Taxable individual and joint account
- SEP IRA
- Self-employed and individual 401(k)
- 529 college savings
It's also worth verifying if there are minimum account balances, and what, if any, are the fees if you don't meet the minimum.
Know what you're paying for
This is true for online brokers, and for investment companies and advisors. Take the time to understand the fees you'll pay, what you'll have access to, and if your advisor is truly required to operate in your best interest.
At the end of the day, it's your money. Get the best returns you can without paying more for trades or advice than you should.
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