An overwhelming choice beginning investors face is deciding where to invest. The question I’ve been asked over and over is, “What’s the best mutual fund company or best broker for online trading?
The quicker you decide where to invest, the quicker you can start investing. Which means, the longer you can take advantage of compound interest.
However, you shouldn’t be in such a hurry because where you decide to invest is one of the most important decisions you make.
The purpose of this post is to breakdown the considerations when deciding who the best mutual fund company or best broker for online trading is.
How Does a Typical Gen Y Investor, Actually Invest?
For this post, I’m judging who the best broker for online trading is, through the view point of someone who dollar cost averages. Since this is how most Gen Y investors, invest. Therefore, instead of making a onetime trade, they’re systematically investing once a month.
Mutual Fund Companies v. Investment Brokers
There are two options to choose from for online trading, mutual fund companies and investment brokers.
A mutual fund company, such as Vanguard, Fidelity, and T. Rowe Price allow you to invest in their own mutual funds. For example, if you invest with Vanguard, you’re choosing to invest in Vanguard mutual funds.
In comparison, an investment broker allows you to invest in anything that is traded in the stock market. However, you pay a commission each time you make a trade.
Mutual fund companies will be better for some, and investment brokers will be better for others. Here’s a breakdown of the advantages and disadvantages of both.
Advantages of Mutual Fund Companies
- Typically, no commissions if you invest inside of mutual fund family. Thus, better for dollar cost averaging.
- Customer service is familiar with products and services
Disadvantage of Mutual Fund Companies
- Higher minimums to open an account
- Annual fees for having a account
- Can only invest within mutual fund family, or, pay high fees if you want to invest outside
Advantages of Online Brokerage
- More investment options
Disadvantages of Online Brokerage
- Commission paid on each transaction, which is bad for dollar cost averaging.
Fees are what’s Important
Out of everything to take into consideration, fees are the most important. The difference between going with a low fee account vs. high fee can be thousands of dollars over your life.
Don’t believe me?
Say you started a Roth IRA at the age of 22. Until you’re 70, you contribute $5,000 a year. If you earn 9% a year, you’ll accumulate $3,729,328 at the age of 70.
If you earn only 8.25%, due to paying .75% more in fees each year, you’ll accumulate only $2,882,085. A difference of $847,243, just from paying .75% more in fees each year.
What I recommend you do, is to simulate the exact amount of fees you will pay over the course of five years with your different mutual fund companies and investment brokers. Only consider mutual fund companies or brokerages, if they minimize fees.
Mutual Fund Companies and Brokers Known for Low Fees
To aid your search, here are a few companies that are known for their low cost approach to investing.
Investment Brokers
Mutual Fund Companies
Other Considerations for Choosing the Best Broker for Online Trading
Fees are the main concern, but not the only concern. Here’s a checklist of what else you should consider when deciding where to invest.
- Allow you to input your trades into TurboTax?
- Allow electronic transfer from bank account?
- Premium services once you reach a certain account balance?
- Do you want to be able to walk into a service center?
- Allow dividends to be reinvested for no cost?
- Allow IRAs or other types of retirement plans for the self-employed?
- Do you like their website and is it easy to use?
- Any fees for moving funds?
- Maximum amount of shares that can be purchased at once?
- Stability of company?
- Quality of customer service?
- SIPC Insured?
- Minimum holding periods for fund?
- Research tools?
How I Invest
My Roth IRA is with Vanguard, a mutual fund company.
I own a few shares in Berkshire Hathaway because I’m looking to attend next year’s meeting to hear Charlie Munger and Warren Buffett speak. For this, I used Sharebuilder, a discount brokerage. I made a onetime trade for $9.95.
I could have opened a brokerage account inside of Vanguard, but fees for doing so are $20 a year, if you have less than $50,000, plus $7 a trade. Plus, I bank with ING Direct, who own Sharebuilder, which means I don’t have to login to Sharebuilder to see my balance (If that sounds lazy, that’s because it is).
What about you? How do you invest? Are you paying the lowest fees?
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{ 5 comments… read them below or add one }
I have $60 a paycheck ($120 a month) automatically deposited into a Roth IRA brokerage account at Charles Schwab (where I having my checking account), but I took a look at their investment fees, and they’re much higher than those at ShareBuilder (the service my mom-in-law, also a CFP) recommends.
I only have $360 (as of last week) saved, but I’m trying to figure out what to do with it. Should I cancel the direct deposit and close the Roth IRA brokerage account with C. Schwab and just set up an automatic transfer to ShareBuilder? Or should I do a direct deposit to ShareBuilder? (I’m leaning away from this option becuase it means I’d have to rearrange things with my HR department *again*.)
I know it’s a pain to go through HR but fees really take away from performance.
Another option to look it as T. Rowe Price. They allow you to invest $50 a month and pay no fees. I also believe that they waive the account fee if you agree to electronic communications.
Good luck.
Vanguard is very good. But I wouldn’t really say their is a “best” in either category. Online brokers are almost all so cheap that the most important thing is service and good online systems, in my opinion.
I’m a believer that there is no perfect company out there. I found Vanguard great for me but it wouldn’t make sense to others.
That’s why I emphasize trying to simulate what type of fees you’ll pay.
I’ve only used Fidelity, and I’ve been pleased with them for the last few years. I don’t trade very often and I’ve only used their online site, so I’m probably not the best source for how they are overall. But I have no plans to switch as of now because I like their low-cost funds that I currently invest in.