Choosing a broker is more than a function of the lowest commission. There are several other factors to consider which will vary in importance depending on who you are and how you invest. This article will discuss those issues including some steps you can take to make sure you are putting your prospective broker(s) to the test.
[VIDEO] How To Choose a New Broker
Service
At Learning Markets we interact with thousands of individual investors. Surprisingly, we hear quite often how afraid investors are of their brokers. This fear seems to stem from a feeling investors have if they ask questions or have problems they will look or sound stupid.
This attitude is not necessarily bad for the broker. If you are afraid to call then they aren’t paying their support reps which is good for them and bad for you. We suggest that individuals put their prospective broker’s service to a two-step test detailed below before committing to moving or opening an account.
Call during peak and off hours. The response you receive will tell you a lot about how a broker staffs during busy market times. When you have an issue, long hold times can be extremely frustrating.
Ask detailed trading and investing questions. For example, ask your potential broker to explain how a bond’s yield works or whether selling a put is riskier than buying a stock. You may be surprised to find out how little the broker on the phone actually knows.
Products
Most of the brokers we surveyed when writing this series has a similar product line. They all offered brokerage for stocks, options, bonds and mutual funds and a few even offered access to futures and forex. This sounds good but it does not mean they are equivalent. Stocks and options may be fairly straightforward and equally convenient but that is where the similarities end and the differences begin.
If you trade something other than long stocks and options, ask for a demonstration. Make sure the broker can show you how to buy a bond, mutual fund or option spread before you check those requirements off your list. Chances are very good you will see significant differences in the ease and availability of order entry for non-stock and option trades.
Interest Rates
Brokers charge interest on margin and will usually pay interest on unused capital balances. The rates vary considerably from stratospheric charges to near zero payments. This is another area of differentiation and for most traders, that will hold a cash balance, it can turn into a material opportunity cost.
Tools
We saved tools for last because that is where they belong. Tools can only be an advantage if you actually need them or can’t get them for free somewhere else. Before you include a broker’s stock or spread screener into your consideration double check with free finance portals like Yahoo! finance or Nasdaq.com to make sure the same thing isn’t available for free.
This is true for any of the tools marketed as an advantage. We feel that most investing tools fall within a category we call “financial porn.” They may look attractive but they have almost no ability to translate functionality into profitability.
Keep in mind that brokers work for you. They may attempt to shift that balance of power to themselves by requiring “applications” and withholding or charging for quality service but the bottom line is that you are paying them not the other way around.
Don’t get married to a specific broker; keep them on their toes by holding accounts with more than one at a time. Most importantly make sure you are doing rigorous due diligence before finalizing your account. You will learn a lot about them in that process that can save you time, money and heartache in the future.