Using a discount broker to manage your own money.

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

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 the two above.

The Two Kinds of Brokers

One of the themes of this site is to do-it-yourself, so you can get both better results and not have to pay anyone for "advice" that's biased and full of conflicts of interests due to several kinds of shenanigans. So we advocate using a discount broker, and not a "full-service broker."

Here are examples of full-service brokers we recommend avoiding: Merrill Lynch, UBS, A.G. Edwards, Wachovia, Smith Barney, and Morgan Stanley. Basically we recommend avoiding all "stockbrokers," AKA wirehouses.

Their reason for existing is simply to squeeze as much commissions from you as possible. This is the exact opposite approach we advocate, as you can read about here, here, here, here, and here. Like the old saying goes, "All a broker does is make you broker."

If you go with a full-service broker, they're going to be mailing and calling you all the time trying to get you to make trades, so they can make more commissions. It's ALL about drumming up trading commissions in their world.

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. So the factor that's going to help you settle on one is probably going to be a particular bell or whistle you want. 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 best. We don't have ongoing experience with investment custodians because we don't custody client money (so we don't use them - with our deal, everyone has to use their own custodians and make their own trades based on our "suggestions"). Also things change too often, and everyone's business and investment needs are different. So people 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.

These days, about the only thing to whine about with local discount brokers is that they won't have "selling agreements" set up with enough mutual fund companies. So the bottom line is that you won't be able to buy all of the coolest mutual funds simply because they're "too lame" to too cheap or too lazy to "get with the program."

For a while, 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 people seem to be using TD (Waterhouse) Ameritrade the most.

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

But again, all of this is like playing "whack-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, 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.

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

The rest of this page refers 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 annoying paperwork and then you'd be pretty much 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.

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.

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 these fees even if you buy the mutual 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. Some say the privacy concerns outweigh the extra work. The large 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 dozen 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.

Cool 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 the evil 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 $9 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 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.

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 in no time.

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 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).

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 will allow access to various portfolio management software, so you can analyze your portfolio. This may be worth an extra $10 a pop in ticket charges to you. On the other hand, these days you can use similar free online portfolio tracking services from Google, MSN, and Yahoo.

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, so that's rarely a concern.

If we had to choose, we'd favor a broker that provided good quarterly and annual consolidated statements, or free access to portfolio management software. At the time of this writing, most of them didn't even provide decent consolidated quarterly 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 2007 to 22 Aug '10, 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 offering it for free. It's unclear who does what at any given point in time, and since this is all free and we don't make any money from it, we don't know and are not going to keep up.

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. You should use this page to determine what features and things you want, which ones you don't want, and then shop around. Again, don't forget to call your local regional discount broker, as most people 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 Google "discount brokers" with the quotes.

'09 Information on Major Custodians for Professional Money Managers

For RIAs, we recommend that you check out TradePMR in addition to all of the other trading custodians. They're up and coming fast, specialize in the RIA market, a lot of our customers have been using them, and are very happy with them. We have yet to hear any whining about their services.

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 Portfolio Center 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%. TradePMR was probably still too small to have been included in the study).

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 (EISI) 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 EISI 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%).

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 per 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%).

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 then 2% in votes from RIAs for "Best Overall Custodian": Raymond James, SEI, and everyone else.

The table below shows some mid-'07 rating information from Smartmoney.com. It's not updated. The more little stars the better.

Broker*	Commission ($)**	Interest Rate on Cash (%)***	Mutual Funds	Investment Products	Banking Amenities	Trading Tools	Research	Customer Service
Banc of America	5.00	4.59	*****	*******	********	*******	*******	*******
Charles Schwab	12.95	0.96	********	*****	********	**	*****	********
E*Trade	9.99	1.00		*****	*****	*****	*****	********
Fidelity	10.95	3.58	**	********	*****	*****	********	*****
Firstrade	6.95	4.39	**	********	*******	**	**	*******
Muriel Siebert	14.95	4.47	**	*****	*******	*******	*******	**
OptionsXpress	14.95	4.09	*******	*******	**	********	*******	*******
Scottrade	7.00	3.25	*	********	*	**	*******	********
SogoInvest	3.00	3.00	NA	NA	*	*	*	**
TD Ameritrade	9.99	1.65	********	*******	*******	**	********	*******
TradeKing	4.95	1.00	*******	*****	*******	********	**	*******
Vanguard	25.00	5.11	*	********	*******	*	********	*******
WellsTrade	Free	2.00	*******	********	*****	*	*******	*******
WallStreet*E	9.99	4.49	********	********	**	**	*	**

Criteria are not equally weighted.
** For clients with a balance of $50,000 making no more than a few market trades per month.
*** Customers may be able to get higher rates if they ask.
SOURCE: SmartMoney Research

Also see: Expanded version of Premium Brokers table, which includes margin rates.

The three big clearing firms for BDs with independent financial planners are Pershing, Schwab, and Bear Stearns.

Pershing has better monthly statements 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 and Bear Stearns. No matter what you do, Schwab keeps them all. That's about a 20% increase in "free" revenue for some investment managers, so definitely account for that before hiring Schwab.

Pershing will 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).

Bear Stearns varies on all of these factors based on what they're into at the time. They have scaled back their operations since "going under."

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!

A lot of people these days seem to prefer TD Waterhouse/Ameritrade over Schwab.

Here's an old list of Clearing Firms ranked by number of clients

Name	Number of Clients
Pershing	852
National Financial Services (Fidelity Investments)	353
Bear Stearns Securities Corp. (Global Clearing Services)	335
Pension Financial Services, Inc.	250
Southwest Securities	219
Goldman Sachs Execution & Clearing	193
First Clearing, Wachovia Securities	148
RBC Dain Correspondent Services	138
Broadcourt (Merrill Lynch & Co.)	118
ADP Clearing	100
Wedbush Morgan Securities	92
Sterne Agee & Leach Capital Markets	86
Fist Southwest Co.	78
Mesirow Financial Holdings, Inc.	75
Neuberger Berman	70
North American Clearing	60
Emmet A. Larkin Co.	55
Legent Clearing	55
Jefferies & Co.	53
Raymond James & Associates	42
Source: Tower Group

Here's an old list of Clearing Firms ranked by most advisor served as of 12/31/2007

Company	Fee Advisors Served	Fee-Based AUM ($B)	Years of Fee-Based Service
LPL Financial	7,736	$79.0	17
Schwab Institutional	5,500	$583.0	21
TD Ameritrade Inst	4,500	$75.0	17
Fidelity Inst Wealth	3,280	$200.5	17
Raymond James FS	2,873	$44.9	32
Securities America	1,398	$13.5	14
Royal Alliance	1,385	$17.1	6
FSC Securities	1,336	$13.0	12
Northwestern Mutual	1.249	$11.3	7
AIG Fin Adv	!,230	$9.9	N/A
Source: Tower Group

Here's an old list of Clearing Firms ranked by most assets under management/custody as of 12/31/2007

Company	Fee-Based AUM ($B)	Fee-Based Advisors	Years of Fee-Based Service
Schwab Institutional	$583.0	5,500	21
Fidelity Inst Wealth	$200.5	3,280	17
LPL Financial	$79.0	7,736	17
TD Ameritrade Inst	$75.0	4,500	17
Pershing Adv	$69.8	492	14
Bear Stearns	$55.9	124	10
Raymond James FS	$44.9	2,873	32
Commonwealth	$20.4	1,169	25
Royal Alliance	$17.1	1,385	6
Cambridge	$14.0	892	15
Source: Tower Group

Old Generic Info

Firm	Charles Schwab	Fidelity Inv.	Pershing	TD Ameritrade
RIA Unit	Schwab Advisor Services	Fidelity Institutional Wealth Services	Pershing Advisor Solutions	TD Ameritrade Institutional
# of RIAs	6,000	3,500	480	5,000
Assets in Custody	$472B	$290B	$70B	$80B
Breakaway FAs (2008)	123 Teams	102 Teams	16 Teams	59 Teams
Assets, Breakaway FAs (2008)	$13B	$6.1B	$4B	Not provided