1. What’s a Brokerage Firm?

In the same way you need a bank to store your money, you need a brokerage firm in order to invest it. Brokerage firms are where you keep stocks, bonds, mutual funds, and retirement accounts.

Picking a brokerage firm is, in many ways, less consequential than picking a bank. Most of us don’t interact with our brokerage firm every day — or even every month. Still, there are all sorts of ways that picking the wrong brokerage firm can cost you.

The companies that will help you invest fall into a few different categories (though they’ve bled together somewhat in the last decade or so).

1.) Traditional brokerage firms (e.g. Merrill Lynch, Smith Barney, etc.): These are the firms that have been around for decades and, in the old days, used to pair you up with a man (always a man) in a suit (always a suit) to help you pick stocks. For this privilege, you’d pay a fat commission every time you moved your money.

In a recent (and unfortunate) development, the old-fashioned brokers are pushing people with smaller accounts to use call centers rather than talking to the more experienced individual stockbrokers in the office. Also, a lot of the old-fashioned brokerage firms have moved to charging a set fee based on the amount of assets you have, as opposed to charging commissions for each transaction.

2.) Discount brokers (e.g. Charles Schwab, Fidelity, E-Trade, etc.): Nowadays, discount brokers often compete head-to-head with the traditional brokers. They got their discount moniker because they charged smaller commissions, often because there were no brokers there to give you investment advice.

A lot of traditional and discount brokers run their own mutual funds too. In fact, many of these companies are in lots of different businesses — some are part of bigger banks, they may administer your 401(k) plan at work or your 529 college savings plan as well. But these firms will let you buy and store any stock or mutual fund — and plenty of other investments, too.

Again, the big difference between the first two types of firms is price — it can still be much cheaper to invest with a discounter. The traditional stockbrokers offer more hand-holding and advice, especially if you have a lot of money, but the discounters have added staff that does similar work in recent years, too.

3.) Banks: Many banks, like Citi, have owned brokerages for years (in this case, Smith Barney). Others, like Wachovia, have bought brokerages more recently (in this case, A.G. Edwards). Bank of America stepped into the arena big time by agreeing to acquire Merrill Lynch. Wells Fargo has made similar moves.

To add to the confusion, many brokers, like Schwab and E-Trade, have added excellent banking services. Essentially, everyone wants you to store all of your money with them, whatever you’re using it for and however often you’re using it.

2. Do You Need A Broker?

To figure out if you need an investment broker (and what kind), start by figuring out what it is you want to do with your investment cash. Then consider what you’ll need to make each of these goals easily achievable. Consider the scenarios outlined below.

1.) I’m looking to buy and sell shares of stock frequently, because I enjoy the game and think I can win by doing better than the overall stock market.

• Brokerage firms usually charge a commission — maybe $5, maybe $50, depending on the firm — each time you buy or sell stock, mutual fund shares, or other securities. If you’re buying and selling often (and we don’t recommend this), commissions will matter a lot. If you have an account of decent size, you can trade at very low commissions, but the broker will charge you a fee based on the size of your assets.

• You may also want to use the proprietary investment research reports or tools that your brokerage firm licenses or creates. Traditional firms like Merrill do a lot of original research, and you probably won’t be able to access it at, say, Schwab, unless you were willing to pay for it.

2.) I’m not a trader, but I do add money each month to my savings and want to invest it as soon as it lands, which means I do need to trade (or at least buy) a fair bit.

• Again, the commissions that brokerages charge when you buy or sell stock, mutual fund shares, or other securities can add up.

• But brokerage firms like Schwab, Fidelity, E*Trade, and others allow you to purchase shares of many popular mutual funds without spending a cent. Bank of America and Wells Fargo, meanwhile, offer free stock trades across the board for certain customers, instead charging fees based on the size of your overall assets.

3.) I’m investing money for a relatively short-term goal (e.g. buying a home in five years) and probably not moving it around all that much.

• If you’re saving up for a short-term goal, such as a down payment in three to five years, you may not be starting with much money. Many firms offer better privileges, lower fees, and more personalized advice only to customers who have larger amounts of money.

• If you’re investing only a small amount, you may want to seek out a firm that makes a point of welcoming younger investors or those who haven’t saved much yet. The discount brokerages are probably a better bet for these purposes.

4.) I’m setting up retirement accounts — or rolling them over from previous employers — with the intention of hanging on to them for 30 or 40 years.

• So you’re in it for the long haul. If you start early enough, you’ll soon have a sizeable amount of money — enough to qualify you for lower fees.

• Once you don’t have to worry about fees anymore, you may want advice from time to time about the right way to allocate your assets — what to invest within each category (stocks, bonds, cash, etc.). Most firms can help with this, and will often let you talk to an advisor for free before you decide to move your money to the firm.

3. Advice on Choosing a Brokerage Firm

No matter what your goal is, you should definitely test-drive a brokerage firm before opening an account. Scour its web site, visit its offices nearby, and talk to the phone reps to see how smart they seem. And listen carefully to see how much they push their own mutual funds and other products, even when they may not be right for you.

Think you’re all set because your parents’ broker offered to help you out? Think again. Brokers who do this sort of thing are often simply trying to keep the parents happy, not because they know much about what it’s like to start out as an investor or how to help such a person. Ask the same questions you would of any broker before you make a move like this. (Find the right questions to ask in our Grilling Guide .)

In the end, if you follow our advice about index investing and reallocating once each year, it won’t matter much where you keep your money. You won’t be trading often enough to run up many commissions, and within a few years you’ll make enough money overall to avoid any minimum balance fees. And if you’re working with an independent financial planner, you can often keep your money anywhere you want and simply act on the planner’s advice once each year.

Many of us here at FiLife are with discount brokers ourselves: Schwab, Fidelity and Vanguard, though our fearless leader ended up at Merrill thanks to a wily cold-caller. We like the combination of robust tools and web sites, which the discounters have, and the fact that there isn’t a push broker assigned to our account whose motive we need to constantly question.

When we want advice — and getting advice is a good thing — we go to a financial planner. Again, go here to read more about how to find a good one.

The good thing here is that it’s not a total disaster if you pick one brokerage firm and then realize you’ve made a mistake. Switching is a bit of a pain but probably not as bad as switching banks or even primary credit cards these days.

4. Grilling Guide: Questions to Ask When Picking a Brokerage Firm

How much does it cost to trade stocks?

These days, it should be less than $10. If you’re going to be trading a lot, you should be trying to pay even less than that.

How many mutual funds can I trade for free — and what does it cost to buy and sell the other ones?

Many brokerage firms have fund supermarkets of various sorts, with hundreds of mutual funds that customers can trade without paying any commissions. If a firm you’re considering has no such list, ask what it will cost to buy and sell mutual funds under various circumstances (buying 10 shares or buying 1,000; does selling have different prices; does it depend on the fund; etc.).

Are there any fees for having too low of a balance?

There may be account maintenance fees for customers with low balances. Sometimes, you can avoid these by doing your banking with the firm too, or agreeing to invest money automatically each month.

Am I not allowed to meet with anyone in person if my balance is too low?

Old-fashioned stockbrokers like Merrill Lynch have been requesting that people who have $100,000 or less in their accounts call 800 numbers for support. The firm would rather its exalted brokers not bother with the riff-raff. Apparently, the firm doesn’t care that small accounts often grow into giant ones. If this is the sort of company you’d like to do business with, be our guest. But we wouldn’t advise it.

What special privileges are there for having more than a certain amount of money invested with you?

Can you help me manage my portfolio and, if so, what does the advice cost?