What is a ‘Brokerage Account’
A brokerage account is an arrangement between an investor and a licensed brokerage firm that allows the investor to deposit funds with the firm and place investment orders through the brokerage. The investor owns the assets contained in the brokerage account and must usually claim as income any capital gains he incurs from the account.
BREAKING DOWN ‘Brokerage Account’
There are several different types of brokerage accounts and brokerage firms; investors can choose the type of brokerage account and broker that best suits their financial requirements. Some full-service brokers provide extensive investment advice, charging high fees for their efforts. Most online brokers simply provide a secure interface through which investors can place trade orders and charge relatively low fees for their services. Brokerage accounts can also differ in terms of order execution speed, analysis tools used, scope of tradable assets and the extent to which investors can trade on margin.
Full-Service Brokerage Accounts
Investors seeking the expertise of a financial advisor should look to the services that are provided by a full-service brokerage firm. The most well-known full-service firms are Merrill Lynch, Morgan Stanley, Wells Fargo Advisors and UBS. Financial advisors are paid to help their clients develop investment plans and execute the transactions accordingly. Financial advisors can work on either a non-discretionary basis, where the client must approve any transaction, or on a discretionary basis where client approval is not needed.
Full-service brokerage accounts have two types of fee structures, either on a commission or advisory fee basis. A commission account generates a fee anytime an investment is bought or sold, regardless if it was the recommendation of the client or advisor. Advisory fee based accounts have a flat annual fee, ranging from 0.5% to 1.5% on the total account balance. In exchange for the fee, no commissions are charged when investments are bought or sold. Investors should determine the most cost effective option by discussing it with the financial advisor at the start of the relationship.
Discount Brokerage Account
Investors looking for the do-it-yourself brokerage option may be interested in using discount brokerage firms. These firms have significantly lower costs than full-service brokerage firms. However, like the name suggests, a discount brokerage firm offers fewer services in exchange for lower fees. Firms like Charles Schwab, Scottrade, E*Trade, Vanguard and Fidelity are examples of the most popular firms that offer these services. Investors can complete low-cost investment trades using easy-to-use trading online software coupled with research and analysis.
For example, as of 2016, an investor who signs up with E*Trade could open a regular taxable brokerage account or retirement account at no cost at a minimum of $500. To buy or sell a stock, option or ETF, the commission would be $9.99 per trade. Treasury bonds are $0 per trade and secondary bonds are bought at $1 per bond (with a minimum of $10). E*Trade also offers a variety of institutional no-load mutual funds for $0 per transaction.
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