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About Using an Online Discount Broker to Manage Your Own Money

- and -

About Using an Online Discount Broker to Custody Your Investments vs. Going Directly through Mutual Fund Families

- and for Financial Professionals -

Selecting a Custodian for Your RIA Business

This page helps investors decide what to do with their money, if they want to manage it themselves. Then there's a little beef for fee-only RIA advisors at the bottom.

There's little-to-no beef for BD Reps, and Fee-Based advisers, because they're stuck with their BD's custodian.

One always has to use what's called a "custodian" to hold tax-qualified investments, like IRAs or 401(k) rollovers.

A custodian may not be a broker, which could mean little-to-no trading.

When it comes to the end of the asset allocation process, you'll need to buy the actual investments (open-ended mutual funds). There are three ways to do this:

1) Use either your existing broker, or hire a new one, to make the trades.

2) Do it all yourself directly through individual mutual fund families.

3) Use a combination of these two ways.

Both of our do-it-yourself money management systems (here and here) give you the choice of opening your own discount brokerage account and make your own trades, or you can hire us to be your money manager to custody your accounts just like a local adviser.

This is just an FYI page and is not kept current.

About using an online discount broker to custody your investments.

The Two Kinds of Brokers

One of the themes of this site is to do-it-yourself, so you can get both better non-biased results, with no conflicts of interest, and not have to pay anyone.

So we advocate using an online discount broker, and not a "full-service broker" (AKA wirehouses).

Full-service and discount brokers are all pretty much the same these days in a lot of ways, as they're all using the same technologies. Most of the full-service brokers had no choice but to morph-down into being a discount broker, because the Internet made it so investors can do their own "research." For example, Merrill Lynch is now MerrilEdge.

So the factor that's going to help you settle on one is probably going to be a particular bell or whistle, ticket charges, minimum account sizes, how much of a drive is to get to their office, how much they like the people at that office, and what type of free investment software is available.

You get what you pay for, so you'll have to shop around and compare what you're getting for the money you'll be paying them.

Sorry but we can't give any advice on which discount brokers or custodians are the "best." We don't have ongoing experience with investment custodians because we don't custody client money, so we don't use them.

Also things change too often, and everyone's practice and investment needs are different. So investors and advisers need to do their own homework in this area.

Investors tend to have the best experience when they get a recommendation from someone they know in their local area that has been using one for a while.

A new trend is for investors to use local / regional discount brokers. They are convenient to drive to in person, and have costs and services similar to national firms.

The more time goes on, the more they will all be the same. This is because there's only so much that's possible to do, and with rapid advancements in technology, even the little guys will be able to offer the same products and services at the same prices as the big leaders in this space.

About the only thing to whine about with smaller local discount brokers is that they won't have "selling agreements" set up with enough mutual fund and ETF companies.

So you won't be able to buy enough mutual funds, simply because they haven't invested enough into their platform yet.

So when you try to input a ticker symbol you want to buy, they'll make up something to make it look like it's not their fault, when the truth usually is that there's just not enough investors wanting to buy that Mutual fund, so it's not worth spending the time and money getting a selling agreement with that fund family.

So they'll usually tell you that, "it's closed," just to get you to go away without bothering them (when most of the time, it's not really closed).

For a very long time, Charles Schwab (Schwab Institutional) was the most popular, and is (probably) still the most-used custodian for independent RIAs.

Then E*Trade was popular, but these days investors seem to be using TD (Waterhouse) Ameritrade and Scottrade the most.

E*Trade has been struggling for a while due to better competitors, so....

Over the long-term, Schwab was the best at financial innovations, like offering a credit card, paying ATM fees, and helping advisors do their thing while overseas, etc.

All of this is like playing "Whac-a-mole" because it changes on a daily basis. It seems that who's on top at the moment with the new tech widget only lasts a quarter or so, and then everyone follows suit.

So you'll need to do your own homework to see who's the best fit for your deal today. All we can say about all of this is already on this page.

Here's some text from a subscriber that actually did some research on this in Dec '11:

"..hey sir- just for grins, I went back to march 2010 in our communications to ID all the instances where I had to ask you for alternatives because e-trade didn't have the funds you'd suggested. I compiled that list and there were 15 instances (all no-load funds). I made note of those symbols, and then researched - on TD Ameritrade. They had 8 of the 15; and at Schwab I had to rely on an individual doing the look up for me (I didn't realize that I could create an account with $0 until after-the-fact, so I could've have done the look-up myself). And based on what this CSR told me - Schwab had 13 of 15. Scottrade had 14 of 15 (these guys are top-rated). I am investigating what's involved in moving my money here. Also I pulled the trigger on the account transfer from e-trade to Scottrade."

and then a few days later:

"...and they told me that the "exit fee" charged by e-trade, will be reimbursed to me by the folks at Scottrade up to $100. Nice of them, eh?... Here's a chart I made for you:"

No-Load Fund Ticker e-Trade Availability (3/10 - 12/11) Available on e-Trade on 12/30/11 Available on TD Ameritrade on 12/30/11 Available on Schwab on 12/30/11 Available on Scottrade on 12/30/11
GTDYX No No No Yes Yes
SXFIX No No Yes Yes Yes
X No Yes Yes Yes Yes
MEMIX No No No No No
BFOCX No No Yes Yes Yes
LISFX No No No Subsequently Closed Yes
BOGSX No No Yes Yes Yes
AHHYX No No No Yes Yes
ERHSX No No Yes Yes Yes
WCOMX No Yes No No Yes
UMBMX No No Yes Yes Yes
X No No No Yes Yes
X No No Yes Yes Yes
X No No Yes Yes Yes
AYBDX No No No Yes Yes

The Pros and Cons of the Two Ways to Invest in Mutual Funds

The rest of this page refers only to discount brokers and not full-service brokers.

The broker would just be buying the mutual funds through their custodian, so you would not have to initially fill out much more paperwork other than their new client form.

So from your point of view, you'd only go through one round of paperwork and then you'd be done. Then you'd make just make your trades either in person, over the phone, or online.

The big disadvantage is that the broker is going to charge you in various ways. First they may charge fixed account fees monthly, quarterly, or annually (wraps).

They're all going to charge a nominal amount to custody IRA money (even if you do it yourself directly through the funds), so this is not something you should be using to make a decision. It cannot ever be avoided.

The biggest ongoing fees are called "ticket charges," or the commission it costs to make a buy or sell trade.

These transaction charges don't go to pay people, so they are different than commissions (which you pay to a human broker). Ticket charges pay for the costs of trading, and there's no way around it.

Some discount brokers have recently been advertising "free trading." Trading is never free, so they're going to get money out of you one way or another, so pay attention.

When a mutual fund is bought for free via the "no transaction fee," then they may want to charge you double if you sell it before 90 days or so.

Another way the broker makes money that is "free" to you, is that they keep the mutual funds' 12b-1 fees. These are internal mutual fund fees that most all fund families charge, and claim to use for sales, marketing, promotion, etc. You'll still have to pay them even if you buy the fund directly from the fund family. So this money just disappears and provides no value to you using either method.

When you go directly through the fund family, they keep it and use it as originally intended when the laws were first written back in the Stone Age.

Over time, the law has been stretched, and now it's just an added form of hidden compensation to financial advisors, and the brokerage firm, when you buy mutual funds through them.

When you do it yourself, you initially contact each individual mutual fund family. Then they either postal mail you an application, or you download it online. Then you fill it out and mail a check into each mutual fund family (or some may have electronic / online ways of applying and transferring money). So there may be an initial delay of a few days using the post. After that, delays are about the same for both methods.

You'll have to repeat this process with every mutual fund family. So if you're totally with our program, you may have to do it up to 21 times. Most clients say it's not as daunting of a challenge as they thought it would be. But very few people do this anymore just because of the mundane delays, like waiting for postal mail.

Some say the privacy concerns outweigh the extra work. The larger the broker, the more your personal information is probably proliferated throughout all of their subsidiaries, and even to outside data mining firms.

A small mutual fund could have as little as a few employees, so your personal information usually stops there. So if you start getting junk mail right after you open a brokerage account this is where it came from.

Life tip: If you want to be sure where your junk mail comes from, just make a minor typo when it comes to your name. Then when the junk mail starts, you'll know where it came from. For example, if your last name is Smithers, then use Smitherrs when opening the account. Then when you start getting junk mail for Smitherrs, you'll know where it came from. You won't be able to do this with brokerage accounts for legal reasons, but try it other mundane things, and you'll see it's always the land-line phone company, utilities, big stores like Wal-Mart, etc. that are the source of "telling the whole world where you are," even when they promised you they wouldn't do that.

Everything is free when you do it yourself and go directly through the mutual fund families.

Every broker is going to charge you a "ticket charge" that varies from $5 to $39. It's usually the same whether you make a $1M trade or a $100 trade.

Yes, even if the mutual fund is a pure no-load fund, the broker will still usually charge you tickets when you trade it.

When you do it yourself through the fund family, you'd only be buying no-load mutual funds, and there would be no ticket charges or sales charges of any kind. But you're still going to pay the 12b-1 fees though.

So as you can see, ticket charges are mostly irrelevant if you're dealing with relatively large dollar amounts. But they can add up to a large percent of money disappearing in small accounts.

Both ways of doing it will probably allow you to view your account online, and make trades. When going through each mutual fund family, you can only see the mutual funds within that fund family.

For example, if you buy one Oppenheimer Fund, when you log into their website, you'll only be able to see information on that one mutual fund holding. With a broker, you can see all of your holdings together. This is the biggest advantage in using an online discount broker over going directly through the fund families.

The same thing happens with the postal mail. You're going to get statements in the mail from each mutual fund company instead of one consolidated statement from the broker. This is what investor's value most from using a broker - getting a consolidated monthly statement listing all investments and their values (and being able to tinker with them online all at the same time). But then, the biggest complaint about this is lousy statements that can barely be understood.

There will be more mail when you do it yourself. Most are fund prospecti, annual reports, and shareholder voting information. These are important things you want to read and keep, and that brokers are great at neglecting to send you. But some mail will be junk, and so you'll probably end up getting more junk mail when you go directly through the mutual fund families. On the other hand, you can tell them to stop, and they probably will.

Some brokers may allow access to various portfolio management software, to help analyze your portfolio. This may be worth an extra few bucks a pop in ticket charges to you. On the other hand, these days you can use similar free online portfolio tracking services from Bing, Bloomberg, Yahoo, etc.

With all open-ended mutual funds, all trades are only done at the end of the trading day. So in most cases it doesn't matter whether you call the mutual fund company or the broker (or trade online) when it comes to the share price you'll get when you buy or redeem shares. So "speedy execution" is irrelevant either way with mutual funds. Speedy execution only matters with individual securities, like stocks, bonds, and ETFs.

A broker will make mistakes and so you'll have someone to complain to. When you do it yourself, you'll make your own mistakes, and thus have nobody to blame but yourself. The actual fund families rarely make mistakes compared to brokers and individual investors.

If we had to choose, we'd favor a broker that provides good quarterly and annual consolidated statements, or free access to portfolio management software.

Getting good statements is still a rare thing, because it takes real work to make them understandable, with meaningful information. Since there's the ubiquitous "race to the bottom" in this space, there's not much money to invest into this. So if you find a broker that delivers both good quarterly and annual consolidated statements, then reward them by telling the world of this major miracle.

At the time of this writing, most of them still don't even provide decent consolidated quarterly (or even annual) statements. It seems like regardless of how technology progresses, it's just not possible for anyone to produce decent statements.

The ability to input something like, "Show me the total return on the whole account, using actual time weighted methodology, and properly accounting for all contributions and withdrawals dividends and capital gain distributions, from 10 Feb 2009 to 22 Aug '15, is very important to us (but may not be to you).

This is the very difficult and very expensive job of actual portfolio management software. Some brokers are slowly getting with the program, and offer it for free. It's unclear who does what at any given point in time.

Bottom line: Doing it yourself directly through the fund families is most common for smaller accounts and using brokers are most common for larger accounts.

Use this page to determine what features and things you want, which ones you don't want, then shop around.

Again, don't forget to call your local regional discount broker, as most investors who are the happiest are using them (compared to a large national firm, like Schwab).

There's ton of current online information on the subject. Just search for "discount brokers" with the quotes.

Here's a Dec '11 tip though: E-trade has been losing market share for years. One reason is that they refuse to invest in selling agreements with fund families. So when you want to buy a fund, it won't be available. Then to add insult to injury, they lie and say things like, "That fund is only for institutional investors only." So in general, they're the "non-preferred option." But as this page says, they could just have easily fixed that, and could have the best access to the most mutual funds by now.

Information on Major Custodians for Professional Money Managers

This site was plugging TradePMR as a good custodian for RIA's for years. Then I had firsthand experience with them in 2014, around the same time other advisers were asking why I was still plugging them considering all of their growing "malfunctions."

 The malfunction I experienced, was them making an account that was being transferred to Interactive Brokers take over a month longer than it should. I don't think it should take three months to move an account from one broker to the next (AKA ACAT), when other brokers can do it in less than a month. So in my stupid little opinion, you may want to consider moving to Scottrade. TradePMR is proabably fine considering they all have glitches and that was over two year ago.

Why deal with malfunctions in this critical part of your biz, when you can just go use Scottrade? They seem to be doing most everything right, and it just keeps getting better, so just go with that.

Then IB's software may "work" now, but it still has some of the same usability problems as when I tried to use it in 2010.

Now more obsolete data:

Schwab Institutional has about 5,500 RIA firms and ~25% market share, and custody about $542B. They support Advent and IAS. Access to this is mostly free, but they charge for using their PortfolioCenter 5.0 software. In a Feb '10 survey, Schwab got the most votes from RIAs for "Best Overall Custodian" with 35% of the votes (market share: 26%.

Fidelity has around 3,500 RIA firms and ~10% market share, and custody about $335B. They support WebEx. Certain extra costs like access to Oracle and NaviPlan features incur additional costs. In late 2007, Fidelity Institutional Wealth Services invested $50M into a new web-based platform called WealthCentral. It's the first web-based platform from a retail custodian to combine portfolio management from Advent, customer relationship management from Oracle, and financial planning from NaviPlan into a single workstation. In a Feb '10 survey, Fidelity got second place in votes from RIAs for "Best Overall Custodian" with 18% of the votes (market share: 18%). In 2014, they bought financial planning software vendor eMoney. So it will be interesting to see what kind of shenanigans they end up playing because of that.

TD Ameritrade has around 4,500 RIA firms (after the Fiserv acquisition) and ~3% market share. They support ACT, Junxture-im and Outlook. It's free, except for iRebel that starts at $50,000 a year. An important note is that TD Ameritrade only sends out monthly statements. This means they don't supply quarterly nor annual reports, so it's weak on determining how your account has done over various time frames. In a Feb '10 survey, TD got fourth place in votes from RIAs for "Best Overall Custodian" with 7% of the votes (market share: 7%).

LPL Financial is the new competitor on the block for RIA and hybrid Fee-Based advisors. It now offers custodian services to non-affiliated RIAs as well as dually registered already affiliated with LPL (Linsco Private Ledger). In a Feb '10 survey, LPL got third place in votes from RIAs for "Best Overall Custodian" with 9% of the votes (market share: 5%). LPL went public in Dec '10.

Pershing Advisor Solutions has about 480 RIA firms, and custody about $70B, around 80% market share as a clearing firm, and supports Advent. Most everything is free. In a Feb '10 survey, Pershing got fifth place in votes from RIAs for "Best Overall Custodian" with 8% of the votes (market share: 13%).

In a Feb '10 survey, the following custodians got less than 2% in votes from RIAs for "Best Overall Custodian:" Raymond James, SEI, and everyone else.

In 2010, Pershing had better monthly statements than most and sends out good quarterly performance reports.

If you coordinate your BD and your RIA, then you can collect mutual fund 12b-1 fees with Pershing. No matter what you do, Schwab keeps them all. That's about a 10% increase in "free" revenue for some investment managers, so definitely account for that before hiring Schwab.

Pershing will usually let you access more mutual funds and other securities than Schwab. Pershing is much better at answering the phone than Schwab. Schwab is famous for its endless loops of phone computers and voicemail. Pershing also has lower ticket charges (and negotiates). Pershing was the major player in this space before Schwab even existed (and they were the first discount broker to come online with a viable product).

Worry about Schwab eventually stealing your client base. They have all of your clients' numbers and have tried to pull similar shenanigans in the past. People have been saying that for three decades, but nothing has happened yet.

About the pitfalls of not rolling your 401(k) or 403(b) into a brokerage account when you end captivity

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About the Department of Labor's New Fiduciary Rules

Using Asset Allocation to Manage Money

Download Brokerage Data into Spreadsheets

How to Integrate Financial Planning Software Modules to Share Data

CRM and Portfolio Management Software

About Monte Carlo Simulators

About Efficient Frontier Portfolio Optimizers

Calculating Your Investment Risk Tolerance

About 401(k) Plan Management

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