Choosing a brokerage

You need to open a brokerage account if you want to trade market securities or if you want to manage any sort of IRA account. I imagine that second reason will eventually give most of us reason to use a brokerage even if we don’t have money to invest in the stock market, since most of us will eventually leave our current jobs and 401k plans. But there is another reason for anyone to use brokerage, and I’ll go into that first.

Brokerage accounts as savings accounts
Money you leave sitting in a brokerage account is automatically invested in a default money market fund. These often return higher interest than your local bank savings account. My Fidelity account actually returns above 5% pre-tax, and I believe other brokerages also offer similar options. Those interest rates put these accounts about comparable with high-interest online savings accounts like INGDirect or EmigrantDirect (see www.bankrate.com for more options). I also get the added benefit of being able to write checks directly from my brokerage cash balance, and again I’m sure other brokerages have similar features.

Criteria
Regardless how much richer you are than I am, you should probably be looking at discount brokerages with which you will mostly be contacting business online. The three criteria to keep in mind should be price, service, and comprehensive fund coverage.

High-end discount brokerages include Fidelity and Charles Schwab. These have a reputation for good service, and it has been true in my experience that my trade orders have executed very quickly with Fidelity and my 401k rollover process happened without a glitch and my emails are prompted answered. The commissions I pay for trades are also higher, though. Here is the trade commission schedule for Fidelity, and you can see that trades do not become cheaper until you keep a larger sum of money with them.

Cheaper than the high-end is E*TRADE and Scottrade and a few others. There should be lots of online comparison like this site. Then there is the startup brokerage, Zecco, which charges zero commissions. Zecco currently has an additional requirement that anyone who opens an account with them must have two years experience of using online discount brokerages. I am looking forward to opening an account with Zecco, though I currently have a while longer to go before I satisfy this requirement. It will be interesting to see whether they will execute my trades as smoothly as Fidelity does, though I don’t think I would initially trust more than a few thousand dollars with a startup brokerage firm.

Finally, as explained in the portfolio section of this guide, you want to check that your brokerage has a sufficiently wide coverage of low-cost passively managed ETFs, meaning that they have ETFs for S&P500, total market, international, and value investing. Any brokerage with wide offerings of Vanguard funds probably satisfies this criteria.

Vanguard
Vanguard deserves a discussion section of its own because it has a distinct history and a philosophy of not screwing you over. The founder of Vanguard, John Bogle, pioneered the passively managed fund that charged next to nothing in management fees in a time when virtually all other mutual funds charged their customers exorbitant fees to invest their money and, more often than not, not even the market. (See the first section of this page to read how the mutual fund industry is one of the greatest legal shams in modern times.) Vanguard also prides itself on its distinctive ownership structure. No one owns Vanguard in the way that Charles Schwab the man owned Charles Schwab the company. Rather, Vanguard is exclusively owned by its funds, and since its funds are exclusively owned by its investors, Vanguard is exclusively owned by its investors. I have never had an account with Vanguard but it is something I am considering in the future.