Help a Reader: Why Use an Online Broker?

If you’ve been following my financial story on this blog for some time, you will know that I don’t really do non-retirement investing in stocks.

Nor do I do any single stock investing within my retirement accounts.

I’ve made this clear in several posts. And I mostly keep my investing category filled with posts about tax-advantaged retirement investing, information about mutual funds (because that’s what I know and do), and using Vanguard, the mutual fund company.

It’s boring, but I believe it’s all I need to do to build a solid retirement account for myself. Why do more than you have to, right?

But you can plainly see in my sidebar that I highlight the various discount online brokers (a place where taxable, more active trading usually takes place). I also roll out big promotions from these brokers from time to time. So an obvious question pops up: what would PT do with an online broker account? Here’s how the reader recently put it:

I was wondering if you could go more in-depth with ShareBuilder. I noticed you say you opened an account but then write about not investing individually. I feel the need to take advantage of testing out ShareBuilder with the Capital One 360 promotion, but feel rather lost about doing so.

My answer in steps:

  1. I plan on doing a full ShareBuilder review at some point.
  2. I only invest at ShareBuilder (or any online discount broker) if I’ve been given free money to do so.
  3. I have bigger fish to fry with my earned income: retirement (although you could invest in an IRA with ShareBuilder, I choose to do it at a mutual fund company, Vanguard), debt reduction (it’s more important to me that I don’t have debt in my life), building a cash cushion, and diversifying into physical assets (like real estate).
  4. If I was new to retirement investing and didn’t have enough money to start investing at Vanguard (their funds have minimums in the thousands), I would consider opening up a discount brokerage account and investing using an IRA. I would likely purchase shares in boring index funds or target date retirement funds to go inside my IRA.
  5. When my income gets to a level where I am maxing out my tax-advantaged retirement savings options, I will consider the discount brokerage firm as a place to start single stock (likely dividend stock) taxable investing.

So, translation for anyone in the reader’s situation above: if you have a small amount to start investing for your retirement (or if you can only commit to a small monthly contribution), consider an IRA (Roth or Traditional) inside an online broker like ShareBuilder. You could also consider a similar move using the unique service offered by Betterment.

Discount Online Broker ShareBuilder Account Options

Investing account options with ShareBuilder.com

As for what to put inside your IRA with the online broker, well, that’s really up to you. Take time to understand the concepts of diversification, risk, and asset allocation. Lastly, take some time to understand the importance of keeping your investing expenses low. Most discount online brokers will have all the investment types you need though.

I definitely could use your help in answering this question. Do you use an online broker like ShareBuilder, TradeKing, or Zecco? If so, what do you use them for? If not, why?

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Last Edited: February 22, 2013 @ 12:27 pm
About Philip Taylor

Philip Taylor, aka "PT", is a husband and father of two. He created PT Money back in 2007 to share his thoughts on money and to meet others passionate about managing their finances. All the content on this blog is original, and created or edited by PT. Read more about Philip Taylor, and be sure to connect with him on Twitter, Facebook, or view the Philip Taylor+ Google profile.

10 comments
YPFinances
YPFinances

I want to start using Sharebuilder to invest my really tiny Roth IRA but it's still too complicated for me (sad, I know). I just want someone to tell me which buttons to click to put it in one of those target date retirement funds I keep reading about. I'm sure it's simple but for some reason, the word "investing" just seems to make everything seem over-complicated to me.

ontargetcoach
ontargetcoach

PT, I agree on focusing on retirement accounts. There are so many options for retirement it would be difficult to max them all out year after year. If you are maxing them out, then start a business and max out the personal business retirement options too.

Deirdre Kiely
Deirdre Kiely

I use TD Ameritrade for stock trades. It's pretty low cost but I heard there are cheaper ones, probably including the ones you mentioned.

Smackover
Smackover

I use Firstrade.  Historically, i use it to buy stocks with what i consider "play money."  This is money that I don't really care if i lose (i really do care, but i'm just a bit riskier with).  Decent site, decent reviews.

 

Outside of 401K i use a regular broker/certified financial planner.  Considering i feel like i just pay them money and am just a number (like the commercials), i am considering moving it all (other than 401k) to firstrade (or similar).  i believe CFPs provide value for answering questions, etc. but i'm not sure i need to pay them 1% to pick funds using Morningstar.  any thoughts on using actual office brokers vs. online?

Philip Taylor
Philip Taylor moderator

 @YPFinances Just write me a check and I'll make sure it gets invested. ;) Just kidding, but you know you really need to "own" your investing. We're talking potentially millions of dollars that you'll be living off of for up to 40 years. It's important and should be something you take the time to understand for yourself. Sites like Sharebuilder and Betterment make it super easy. Just dig into the tutorials on the sites.

Philip Taylor
Philip Taylor moderator

Thanks for your perspective. I agree with the play money approach. I need to find some of that soon.

 

My thoughts are that I'm my best advisor, and that no person can outperform the market over 40 years. That said, I see the value in, and have used, a fee-only CFP to help me keep things in perspective. This has only recently become the case as my portfolio has only recently reached a value that would justify the extra cost. I will likely never have someone else "actively manage" my funds for me.

Philip Taylor
Philip Taylor moderator

Hey, no worries. I'm all about getting personal here.

 

I would think somewhere between $50 and $150 and hour is what you can expect from a CFP. I actually got my advice for free because I covered the experience: 

 

http://ptmoney.com/meeting-with-a-fee-only-certified-financial-planner-part-1-finding-an-advisor-and-gathering-info/

 

I would think most CFPs have a package deal where they give you a series of tests/questionnaires and then follow it up with a recommendation meeting. Something like this would probably cost between $250 and $1,000 depending on their hourly rate. Because of this high cost, I think this type of service only makes sense for someone with about $250K or more in retirement funds. 

 

But a good CFP will give you a well-rounded recommendation covering things like insurance, cash cushion, etc.

Smackover
Smackover

 @Philip Taylor not to get too personal, but what is a reasonable amount to pay for an hour of a CFP's time?  I'm assuming you utilize them to recommend investments, talk overall financial picture, etc. during that time.  any other thoughts?

 

 

Philip Taylor
Philip Taylor moderator

To clarify, fee-only can be hourly or %.  I personally would work with a hourly planner (once every blue moon), but I don't see a need for an on-going % based planner.

 

And I certainly wouldn't work with a "fee-based" planner who works on commission.