Chapter 11: Money on The Street

Dominick Amato: “I hear all you guys on Wall Street are millionaires, when you gonna make us rich?"

Bud Fox: “Gotta open an account to win the lottery, Dominick. Give me $15,000, you'll have a condo in Florida next Christmas.”

– Wall Street (1987)

If you're ready to save for longer-term goals you should get a brokerage account. This will get you admission to "Wall Street", the global world of finance and investing that draws its name from a few short city blocks in downtown New York. Both are worth a visit.

A brokerage account lets you buy and sell different types of investments, which you cannot do in a checking or savings account. A regular brokerage account is “taxable,” just like a regular bank account. This means that if you earn interest or other kinds of investment income in the account you will owe taxes on that income. But you can also have IRA or Roth IRA brokerage accounts, with the tax benefits mentioned in the last chapter.

Choosing where to open a brokerage account can be overwhelming—and overwhelmingly dull. In the interest of your sanity, I'm going to narrow the choice to just a handful.

There is a rough distinction between “full-service” and “discount” brokerage firms. Full-service brokerages often end up being costly because they have “financial advisors” who are paid to sell you investments. Among the biggest are Edward Jones, Raymond James, Merrill Lynch (owned by Bank of America), Wells Fargo Advisors, Ameriprise, and Morgan Stanley. I suggest staying away from them to keep expenses to a minimum.

Discount brokerages are more or less self-service. They have comprehensive, easy-to-use websites that allow you to research, buy, and sell investments. If you get stuck, they have phone support. Some also have branch offices that you can visit for various services. The biggest are Fidelity, Schwab, and E*Trade. All of them handle traditional and Roth IRAs. Fidelity also offers HSA accounts. For the investment approach that I espouse in this book, I suggest you sign up with either Fidelity, Schwab, or Vanguard. Vanguard has some of the best low-cost mutual funds, which may not be available for free at Schwab or Fidelity. Vanguard's website is a bit clunkier but it works.

There are a host of other brokerage account options. Most likely you don’t need them. Here’s why:

• If you want to work with a financial advisor, you may be asked to go with the company he or she is affiliated with. This could be a bank, insurance company, or so-called advisor platform (such as LPL Financial). But having your brokerage account through one of these entities can be more expensive and less flexible. If you want an advisor, consider one who doesn't require you to keep your money with them. At a minimum, be very aware of any extra fees you are being charged—directly or through the investment choices offered (see Chapter 25).

• Online start-up Robinhood has a millennial vibe but a limited offering. When they first hit the scene they forced other big discount brokers to eliminate commissions, but at this point their services don’t keep up with Fidelity or Schwab. Also, Robinhood tries to entice you to manage your portfolio on your phone. As we’ll discuss in a later chapter, constantly checking up on your portfolio is a recipe for making bad choices.

• You may come across so-called robo-advisors, among the most prominent of which are Wealthfront and Betterment. While these are brokerage accounts in name, they don’t give you the freedom to choose your investments. Instead, for a fee, they serve up investments predetermined by an algorithm. Similar services are cropping up at most major brokerage firms. One drawback of these services is that if you change your mind and move your investments somewhere else you can end up with a hodgepodge of funds and stocks that is more complicated to manage.

• Some mutual fund companies—for example T. Rowe Price—offer brokerage accounts. These are largely an afterthought. Mutual fund companies are in business to sell you their funds.

• There are firms that cater specifically to active traders. Interactive Brokers is one of the largest.

Once you have opened a brokerage account, have a portion of your paycheck deposited into it and start saving. You should also link it to your checking account so you can make additional deposits. Your money will initially be parked in the brokerage firm’s sweep account until you use it to invest in something. A sweep account is simply a very safe investment option (often a money market fund) that is set up not to lose money but also does not pay a lot of interest.

How safe is your money in a brokerage account? Unlike bank accounts, the value of brokerage accounts is not guaranteed by the government or anyone else. If you invest in something that loses money, it’s on you. But pretty much every brokerage firm is a member of the Securities Industry Protection Corporation (SIPC). The SIPC is not a government agency. It gets its money from its members. Using this money, the SIPC steps in if the firm at which you have your accounts goes bust or defrauds you. It will pay up to $500,000 per person. Don’t get an account at a firm that doesn’t display “Member SIPC.” [25]