Critical Items to Know When Opening a Brokerage Account

Opening a brokerage account can be an intimidating process but there is no time like the present! A custodian is a company you choose to safeguard your investment assets within an account. US banks can also have a custodial arm to them, but the brokerage account would not have protection under the FDIC (Federal Deposit Insurance Corporation which protects customers from US bank failure). US custodial accounts have protection under SIPC (Securities Investor Protection Corporation which protects customers from custodial firm failure). There are a lot of options out there and you must do your homework before opening an account.

Once you open an account it is nice to have all your accounts in the same place when possible (company retirement plans can only move with certain reasons, see your HR department). This helps you stay organized. The research and goal setting tools offered through the custodian become much more valuable when they can take all your accounts into consideration.  In addition, you may become eligible for fee discounts the more assets you have.   I have started to collect basic information for you on several firms.  Below is a chart of the top US custodial firms as of July 2017.

At the time of this post the above information is believed to be correct, however, fees and restrictions change frequently. You should verify the above before opening an account. I highly encourage you to call the custodians if you have any questions at all. They have people there waiting for your call and are usually quite helpful. The websites for these firms are below.  I have not been paid or received any benefit from providing you these firm names.

If the firm you like, or currently use, is not listed that is ok; use the criteria in the table and compare what you are getting to these other firms. Know how many assets your firm has, know about the fees for trading and what types of research tools are offered to you. Speaking of fees… it is really important to know that there is a difference between a custodial fee and a fund management fee. It is common for custodial firms to offer you the ability to purchase their own mutual funds for no transaction fee, also known as NTF. This means there is no fee to place a trade to buy or sell the fund. The mutual fund or ETF, however, still collects what is known as an expense ratio. The expense ratio covers the fee for professional money management to run the fund, marketing, and administrative expenses. We will devote next week’s post to analyzing fees before you invest.

Most custodial firms today offer easy online account opening. It is not unusual for a firm to ask for your driver’s license or social security number. If you have a trust account you would also be required to provide trust documents and approval from all the trustees. There are no short cuts here and you don’t want there to be.  Don’t get frustrated by personal questions about your identity. It is the custodian’s job to protect you from fraud and you want them to make sure you are who you say you are. It is also common, once your account is open, for the custodian to verify large transfers or unusual trades. Again, let them protect you and try to not get annoyed. Your custodian will never initiate a request for you submit a wire transfer or request any type of account verification via email or phone call. If you get something you think is genuine you should make a phone call to your custodian first, before providing any information. I like to also recommend that you no longer receive paper trade confirmations or statements, but instead, you only review these online when you are ready to review (at least quarterly). The less your account number is printed and out there in the world the less likely it can fall into the wrong hands. Also, in order to receive the best fees, you might have to utilize paperless statements. Check with the custodian!

If you are unsure what type of account to open, look back at my previous post to help. Also, if you are unsure about maximum investment amounts for an account type you should ask your tax advisor. Never stop learning, knowledge is key!


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