Brokerage Selection

When you are ready to start investing, selecting the right brokerage is a foundational decision that can affect everything from your long-term returns to your day-to-day experience. There are four key criteria you should always evaluate before opening an account with any brokerage:

1. Fees: every brokerage charges fees, but the structure and amount can vary widely. Look for trading commissions, account maintenance fees, inactivity fees, and expense ratios for investment products. Even small differences can add up over time and eat into your returns;
2. Account Types: you want a platform that offers the account types you need for your goals. Common options include taxable brokerage accounts, traditional IRAs, Roth IRAs, and sometimes specialty accounts for education or small business retirement plans;
3. Investment Options: not all brokerages offer the same selection of investments. Some limit you to their own funds, while others provide access to a wide range of ETFs, mutual funds, stocks, bonds, and more. Make sure your preferred investment vehicles are available;
4. Customer Service: good support can save you time and frustration, especially if you run into technical issues or have questions about your account. Consider the availability of live chat, phone support, educational resources, and user reviews.

To make a fair comparison between brokerages, you can use a simple cost formula. This formula helps you estimate your total annual costs at each brokerage, based on your expected trading activity and account balance:

This equation allows you to plug in real numbers for any brokerage you are considering. By comparing the total costs side by side, you can see which platform is the most cost-effective for your specific situation.

Suppose you are choosing between Brokerage A and Brokerage B. Brokerage A charges a $50 annual account fee, $0 commissions per trade, and offers funds with an average expense ratio of 0.10%. Brokerage B has no annual account fee, charges $5 per trade, and has funds with an average expense ratio of 0.15%. You plan to make 10 trades per year and maintain an account balance of $20,000.

For Brokerage A:

For Brokerage B:

In this scenario, Brokerage A would be the lower-cost choice, even though it charges an annual fee, because its lower expense ratios save you more in the long run.