How to Open Your First Brokerage Account

A brokerage firm is one of the first places investors consider for buying and selling stocks, bonds, mutual or exchange-traded funds and other investments.

Just like ice cream, brokerage firms can vary greatly in quality, options and price — from the plain-vanilla variety, such as a discount brokerage for do-it-yourself investors, to a complicated sundae with an assortment of toppings, like a full-service brokerage with a broker to advise you.

Brokers are individuals or firms who charge a fee or commission for executing trades on behalf of their investors. An investor typically opens an account with a brokerage and receives assistance from a broker who works there.

Popular brokerages include Charles Schwab (ticker: SCHW), Fidelity Investments, TD Ameritrade, E-Trade Financial, Raymond James Financial ( RJF) and Edward Jones.

Opening a brokerage account is the first big step to jump-starting your investing journey. Whether you are a hands-on investor or one who prefers your assets to be managed for you, consider these steps in your investment approach:

— How to choose a brokerage.

— How to set up a brokerage account.

— Fees, commissions and account minimums.

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How to Choose a Brokerage

When choosing a brokerage firm, it’s important to consider the following:

— The types of services offered and level of guidance you want: Do-it-yourself investors may prefer a more hands-off broker with an extensive trading platform, while investors looking for guidance may want a brokerage that provides easy access to financial advisors.

— The costs: DIY investors who don’t want any bells and whistles may focus on lower-cost options, while investors interested in full-service brokers will need to weigh costs in relation to the services provided.

Account minimums: Most online brokerages have waived their account minimums, but some firms may charge fees if your balance falls below a certain threshold.

Location: If you want access to an in-person advisor, look for a brokerage that has branch offices in your area.

— Before you can choose a brokerage firm, you need to decide what type and level of services you’re looking for. Decide whether you want to be more hands-on as a DIY investor or if you prefer to take a passive approach by using a full-service brokerage to manage your investment account for you. A full-service broker may be suited for an investor who is not familiar with what they should be investing in, doesn’t want to spend the time to research or manage their investments or has a large amount of wealth that requires more complex financial management.

When looking for options that suit your investment needs, consider a firm’s breadth of services, from tech-based and human-assisted services to a combination of the two, says Cynthia Loh, vice president of digital advice and innovation at Charles Schwab.

Investors who choose the DIY approach and prefer a low-cost way to manage their assets may prefer an online brokerage account or discount broker that enables them to buy and sell investment securities through the broker’s website or app. Meanwhile, investors who want more help in selecting or managing their investments may prefer a brokerage that has branch offices where they can meet an advisor face-to-face.

When searching for a DIY broker, a few things to keep in mind are to make sure the trading platform is intuitive and easy to use, the broker fees are affordable, and the broker offers research capabilities and educational resources that will assist in your investment decisions. Other important components include offering broad trading options and being well-regarded in the investing industry.

Another phenomenon on the rise is robo advisors, an automated investing service that acts as an online financial advisor in managing an investor’s money based on a set of algorithms; some of those variables include the investor’s time horizon, risk tolerance and financial goals, among other factors. This is a way to manage your money automatically with little to no human interaction. Robo advisors can be a great option for investors who want guidance and help managing their investments but don’t want or need the personalization of a full-service brokerage.

Vanguard’s robo advisor, called Vanguard Digital Advisor, has a variety of investment options, requires account minimums and has fees depending on your account holdings. Similarly, Fidelity’s robo advisor, Fidelity Go, asks questions when you get started, from which it develops investing goals. Some of these low-cost money management tools may be suitable for a simplified approach to investing.

Investors should compare each brokerage’s trading commissions, account maintenance and closure fees, investment options, and accessibility.

How to Set Up a Brokerage Account

Follow these four steps to set up a brokerage account:

1. Decide what type of account you want to open based on your goals for your money, such as if it will be for retirement or nonretirement purposes.

2. Fill out the online application or visit a local branch to open the account in-person, if available.

3. Fund the account with a bank transfer, check or transfer of assets from another brokerage firm.

4. Choose the investments you’ll use, such as mutual funds or ETFs.

After you decide which brokerage firm is best for you, the next step is to set up your account. There are several types of brokerage accounts, from nonretirement accounts for individuals or joint owners to retirement accounts such as individual retirement accounts or even accounts designed for college saving (such as 529 accounts) or health savings (such as HSAs).

To determine what type of brokerage account you should open, you need to know your investment objectives, says Kevin Boyles, vice president at Millennium Trust Co. in Oak Brook, Illinois. “Understand the purpose of your money. What’s the time frame you intend the money for? This will dictate the type of account you use, whether it’s a Roth (individual retirement account), health savings account or a nonspecific brokerage account, and will change how you look at the brokerage fee structure,” Boyles says.

The process for opening a brokerage account is similar to setting up a bank account, with one important distinction. For a new brokerage account, you’ll be asked to fill out new account forms that will inquire about your risk tolerance, investment objectives, time horizon and the extent of your financial knowledge in order to build an investor profile.

Most applications typically require you to also provide your contact information, Social Security number or employer identification number, marital status, mother’s maiden name, a financial statement listing information for assets or cash you may want to transfer, and sometimes details from your driver’s license.

[Read: 3 Things to Know About Brokerage Margin Accounts.]

Many firms will have you rank your investing preferences — for instance, preservation of capital, income, growth or speculation — depending on whether you are a conservative, moderate or aggressive investor. This enables the firm’s advisors to make recommendations that are suitable for you based on your profile.

That’s an important distinction because a suitability standard isn’t the same as a fiduciary standard. Registered investment advisors, also called RIAs, who may also be broker-dealers in some hybrid formats, must disclose any conflicts of interest and place their clients’ best interests first, ahead of the advisor’s own compensation.

Broker-dealers, on the other hand, are only required to recommend investments that are suitable for their investors, according to the Financial Industry Regulatory Authority, or FINRA. To conduct securities transactions and business with the investing public in the U.S., firms and individuals must be registered with FINRA.

Broker-dealers can put their interests above their clients’ and make recommendations based on commissions. Think of them as salespeople who are compensated per transaction whether you make or lose money.

After opening an account, you must fund it based on any minimum requirements and determine your investment strategy according to your age, risk tolerance and cash needs.

As for the investments you use, mutual funds and ETFs typically offer more diversification than individual stocks by letting you hold a basket of securities as opposed to just one company. Once you’ve chosen your investments, make sure to rebalance your portfolio periodically according to your target asset allocation by selling inflated assets and buying those that are cheap. Most importantly of all: Don’t let day-to-day fluctuations in the stock market affect your long-term investment plan.

Fees, Commissions and Account Minimums

Most online large brokerage firms offer commission-free stocks, ETFs and other security trades. Before this pricing move, investors trading actively each day racked up the costs per trade. To have an extra edge among the competition, most online brokers offer top-of-the-line research to assist investors with trading decisions.

Most of the top online brokers like Fidelity, Vanguard and Schwab do not charge an inactivity fee. Other brokers may demand a monthly, quarterly or annual fee, or they may require a minimum account amount to avoid a fee.

Many brokers offer incentives for new customers to open an account, such as cash bonuses, free stocks or free trades. Most online brokers do not charge maintenance fees.

[Read: 7 Best Brokerages for Handling Cash Reserves.]

Full-service brokerages or firms that provide a host of financial services to clients tend to have higher fees since they provide more services. These firms can charge a flat fee to manage your account, which can be a percentage of the assets you have with them, an hourly rate or be commission-based, which means they are paid on transactions and sales of a trade. They could even be fee-based and charge both a fee and commissions. Be sure to ask any firm you work with about their fees and how they charge.

If you are investing in a mutual fund, there are embedded management fees in the funds that are separate from brokerage fees, says Bryan Bibbo, an accredited investment fiduciary at The JL Smith Group in Avon, Ohio. “There can also be trading costs within mutual funds that you need to be aware of. Some brokerage firms also charge annual fees and custodial fees on IRAs and Roth IRAs, so look out for those.”

Custodial fees are flat fees attached to the account, which may include the costs of managing the account. Custodial fees can be avoided in some cases if the investor meets a minimum investment threshold. For those brokers who require fees for commission and management, make sure those expenses are minimal.

“In the IRA world: shop and compare,” Boyles says. “Understand what it looks like if your profile changes, and make sure you pick a provider that adapts with you as your situation adjusts. Larger institutions have more flexibility, but smaller firms can offer a more personalized service.”

Robo advisors, prevalent among millennial users, charge an annual management fee but are regarded as a cheaper investment option. Robo advisors tend to charge a fee based on the percentage of the investor account value. So if an investor has $10,000 of assets under management with an annual fee of 0.25%, the cost would be $25 per year for the robo advisor to manage your account.

There are many brokerage options to consider as you embark on your investing journey. To make sure you are choosing the right brokerage for you, your ultimate choice should align with your financial needs and personal financial goals.

More from U.S. News

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Vanguard vs. Fidelity: Which Is Best for You?

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How to Open Your First Brokerage Account originally appeared on usnews.com

Update 04/26/21: This story was published at an earlier date and has been updated with new information.

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