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About Using a Broker to Custody Your Assets 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 non-qualified money, if they want to manage it themselves. A little for advisors is at the bottom. There are two basic methods for using mutual funds to manage your own non-qualified money: Go through each mutual fund family or open a brokerage account. One always has to use what's called a "custodian" to hold tax-qualified assets, like IRAs or 401(k) rollovers. A custodian may not be a broker, which means no trading. All about the pitfalls of not rolling your 401(k) or 403(b) into a brokerage account, is here. 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 two 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. 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. So we advocate using a discount broker, and not a "full-service broker." Here are examples of full-service brokers we recommend avoiding: Edward Jones, Merrill Lynch, UBS, A.G. Edwards, Wachovia, Smith Barney, and Morgan Stanley. Their reason for existing is 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. Full-service and discount brokers are all pretty much the same these days, 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). 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 them for a while. A new trend is for investors to use local discount brokers. They are convenient to drive to in person, and have costs and services similar to national firms. For a while Charles Schwab (Schwab Institutional) was the most popular, and is still the most-used custodian for independent RIAs. Then ETrade was popular, but these days people seem to be using TD (Waterhouse) Ameritrade a lot. 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 paperwork and then you'd be pretty much done. Then you'd make 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. 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 law was first written. Over time, the law has been stretched, and now it's an added form of 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 / internet ways of applying and transferring money). So there may be an initial delay of a few days for 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. 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, you'd only be buying no-load mutual funds, and there would be no ticket charges or sales charges of any kind. 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 large numbers. 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. The same thing happens with the mail. You're going to get statements in the mail from each mutual fund company instead of a consolidated statement from the broker. This is what investors value most from using a broker - getting a consolidated monthly statement listing all assets and their values (and being able to tinker with them all online 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, 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, 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. 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. Bottom line: Doing it yourself is most common for smaller accounts and using brokers are most common for larger accounts. There's ton of current online information on the subject. Just Google "discount brokers" with the quotes. '08 Information on Major Custodians for Professionals Schwab Institutional has about 870 RIA firms and ~25% market share. They support Advent, dbCAMS, and IAS. Access to this is mostly free, but they charge for using their Portfolio Center software. Fidelity has around 3,500 RIA firms and ~10% market share. 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. 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 or annual reports, so it's weak on determining how your account has done over various time frames. Pershing Advisor Solutions has about 475 RIA firms, around 80% market share as a clearing firm, and supports Advent. Most everything is free. The table below shows some mid-'07 rating information from Smartmoney.com. It's not updated. The more little stars the better.
Criteria are not equally weighted. 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. Pershing sends out 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. That's about a 25% increase in revenue for some managers. 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 it's endless loops of phone computers and voicemail. Pershing has lower ticket charges (and negotiates). Bear Stearns varies on all of these factors based on what they're into at the time. Worry about Schwab eventually stealing your client base. They have all of your clients' numbers! A lot of people these days seem to prefer TD Waterhouse/Ameritrade over Schwab. Here's a list of U.S. Clearing Firms Ranked by Number of Clients
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