Choosing the best brokerage platform to begin investing can be a daunting task. The main concerns that most new and experienced investors relate to functionality, research and tools available, and the overall cost to execute trades. Each platform, from Robinhood to Fidelity, offers unique benefits and their own share of downfalls to consider when deciding where to begin or continue your investing journey.
Good News! You can choose a brokerage platform and set up an account fairly easily. No matter your choice, transferring your assets to another broker can be done fairly seamlessly.
In this article, we will look at some of the most popular brokerage platforms available and discuss the pros and cons of each depending upon your personal needs. Whether you like performing technical analysis or would rather find the most commission-free mutual funds or Exchange-Traded Funds (ETFs), some particular brokerage firms specialize their offerings to cater to particular segments of the market in the tools and services they offer.
Robinhood Markets
One of the unique benefits of the Robinhood platform relates to the fact that they do not charge any fees to open an account or to execute trade.
Commission-Free Trading
If you are looking for a place to get started investing and only want to buy a few shares of your favorite companies or index funds, Robinhood has no account minimums and you will be able to buy shares of your favorite stock or funds commission-free. Alternatively, other discount brokerages that we will discuss can charge anywhere from $4.95 to nearly $10. If you are buying a single share of a stock that has a lower stock price, these commissions can become a massive hurdle to overcome.
After all, if you bought one share of a $10 stock with a $4.95 commission, you would have to wait until the stock nearly doubles to just breakeven because of the initial fees to buy the share and the $4.95 fee again when the stock is sold. With Robinhood, these fees are completely eliminated.
Commission-Free Options Trading
Robinhood also allows for commission-free option trading for the more advanced and less-risk averse investor.
Many other brokerage firms will charge a $4.95+ trading commission as well as an addition fee around $.60 per option contract that can escalate the cost of buying options. The Robinhood option platform is fairly rudimentary and simply shows the option expiration date, strike prices, and the percentage increases or decreases to break even on the investment which greatly simplifies those who wish to buy single-legged calls and puts.
Robinhood Downfalls
While Robinhood offers a commission-free trading platform for buying stocks and basic call and put options, certain downfalls do exist with the platform.
While Robinhood is continuing to expand their offerings, they currently do not offer the ability to open any accounts other than individual brokerage accounts. For those looking to save for retirement in tax-advantaged accounts such as a Traditional or Roth IRA, currently, you will have to look elsewhere to open these accounts. If you currently have a Roth or Traditional IRA with another brokerage account, dealing with multiple investment platforms can become much more complicated that having a one-stop shop that houses all of your investment portfolio.
Additionally, waiting on your Form-1099 and other tax forms from various brokerage houses can become time consuming and make tax time more complicated than dealing with a single investment platform.
No DRIP Option
Robinhood also does not currently allow dividend reinvestment, so if you are looking to gain from the power of compounding over a longer time horizon, the inability to reinvest dividends can drastically hamper your overall returns from your stock and fund portfolio. Instead, dividends are paid in cash and are deposited in your cash balance with Robinhood.
No Interest Paid on Cash Balance
Speaking of cash, unlike many other brokerage firms available, Robinhood does not pay interest on your cash balance.
Other platforms such as Fidelity, deposit your cash balance in FDIC money market accounts where you are at least paid a small percentage in interest. If you have a large cash balance for liquidity, earning 0% on your money will cause you to lose out to inflation. While the interest in minuscule with other brokerage firms as they typically pay less than 2%, the fact that Robinhood does not pay interest on your cash is one way the company makes money on the float they receive from investors who delay in buying stocks.
Instead of returning the interest on your money back to you, they are able to purchase short-term, insured investments and capture the small amount of interest rather than remitting it to the account holder.
Market Order Execution
From personal experience using the Robinhood platform, when initiating a market order, many times I did not get the best possible price.
Other platforms such as Fidelity offer a price improvement program and if you issue an order at a certain price, they will purchase part or all of your order at the lowest possible price. While the executed market orders seem to only be pennies above the lowest price, this can add up if purchasing larger amounts of stock or funds. For single share or a small number of shares, paying a few cents more will not have a major impact on the investment’s return. However, if not getting the best possible price represents a concern for your situation, instead of initiating a market order, select a limit order and the price you wish to purchase the stock.
Bare-Bones Research Tools
The research and tools that Robinhood offers is fairly basic to nonexistent compared to the indicators and research of other brokerage accounts.
Instead, Robinhood does offer content from basic news sources such as Yahoo Finance or CNBC for the stocks the investor is interested. Additionally, Robinhood also offers a collection of general market articles from these same sources. Therefore, if you are looking to perform in depth research and analyze analyst reports about the companies you follow, Robinhood may not be the best choice.
Robinhood Summary
Overall, Robinhood offers a great experience for individuals who do not yet have the money to buy larger quantities and amounts of stock or index funds.
Since investors who use Robinhood have a commission-free experience, the value proposition offered by Robinhood is extremely compelling. Especially for traders and new investors, the commission-free trading structure Robinhood allows will keep costs at $0, allowing you to keep all of your gains even on small blocks of shares. The functionality of the mobile application is very user friendly for new and experienced investors alike and allows for the execution of market and limit orders.
However, for investors who wish to open tax-advantaged accounts such as a 529 Plan, IRA, Health Savings Account, or other non-individual brokerage account, Robinhood does not yet allow for these types of accounts. Additionally, another key downfall that will hopefully be solved in future iterations is the inability to reinvest dividends which will hamper the compounding of your portfolio over time.
Due to the easy to use platform and commission-free trading, Robinhood offers a compelling value proposition to house your “fun money” or to begin the investing journey.
Fidelity Investments
One of the most notable and well-respected institutions in the industry is Fidelity Investments.
Fidelity is a private company that has a considerable amount of resources and tools for virtually every investor at a very low cost. In addition to free planning tools, articles, and research, Fidelity also has a network of financial planners and advisers who can offer guidance and advice for every occasion from planning for college and retirement, to implementing tax strategies to help you save money on your tax bill.
One Stop Shop for All Your Financial Service Needs
Aside from the investment planning and advice, Fidelity offers other products and services including the Fidelity Rewards Visa Signature credit card which offers 2% back and no annual fee.
The rewards can be redeemed for cash deposits into a Fidelity brokerage account, cash management account, 529 college savings plan, retirement account, charitable giving account, and health savings account. While credit cards are not a means to build wealth, the ability to redeem rewards from necessary expenses into an account to invest is an interesting value proposition.
Very Low Commissions
In early 2017, thanks to the rise in competition from other discount brokerages as well as commission-free platforms such as Robinhood, Fidelity announced they would be lowering the trading commissions to match many other brokerage firms at $4.95 from nearly $8.
Considering all of the benefits in opening a Fidelity account, $4.95 per trade is a very compelling value. However, unlike the commission-free stock buys that Robinhood offers, you will need to purchase a relatively large amount with each block of purchases in order to limit the impact of the commission on your investment. Typically, keeping the commissions to less than 1% of the total amount of purchase is a good metric to aim. Therefore, you’d need to buy in blocks of at least $500 for this rule of thumb. Needless to say, buying a single share of a low-priced stock is not economically feasible as the commissions would greatly hamper returns.
Commission-Free Mutual Funds & ETFs
While Fidelity does charge for stock and option purchases, the company also offers thousands of no transaction fee mutual funds and ETFs where investors can allocate small installments without being hit with these transaction commissions.
Fidelity also offers branded mutual funds as well as sector ETFs that invest in certain sectors of the market at very low costs. For instance, many of these mutual funds including the Fidelity Select Semiconductors and Fidelity Blue Chip Growth Fund have expense ratios well under 1% due to relatively lower turnover and lower management fees. With the wide selection of funds available, with a little research, investors have the ability to pick mutual funds that have outperformed the S&P 500 or other market benchmark.
If you are an active trader or strive to one day incorporate futures for forex contracts into your regime, another brokerage firm such as TD Ameritrade or Schwab would be best as Fidelity does not offer these services to investors.
Streamline All of Your Accounts in One Place
Unlike Robinhood, Fidelity is one of the largest custodians of 401(k) plans and offers the ability to open Individual Retirement Accounts for retirement investing in these tax-advantaged accounts.
Especially for those who have an employer-sponsored 401(k) or Health Savings Account, the ability to house each of your retirement and brokerage accounts at a single, centralized brokerage house offers a great amount of convenience.
Dividend Reinvestment Program
Fidelity, like most other brokerages, allows the option for dividend reinvestment in each stock you purchase. The ability to reinvest dividends paid will greatly aid in compounding returns in your portfolio over a longer time horizon. While this is standard in the industry, it is helpful to point out this feature for Fidelity as well as the other traditional brokerage firms when comparing to Robinhood.
Interest on Your Cash Balance
Above, we discussed that Robinhood does not pay interest their customers’ cash balance.
Instead, they invest the float of their customers’ cash balance and keep the earned interest instead of charging trading commissions. However, Fidelity does pay interest on uninvested cash by purchasing a Fidelity, government-insured money market fund that currently yields around 2%.
Depending on your cash balance, this could result in a decent sum of interest income especially for those who are in retirement who may have a decent amount of necessary expenses in cash or individuals who like to have a large safety cushion for emergency situations. Instead of losing out the value of their dollar to inflation, these investors are able to at least keep their head above water with a modest return on their cash balance that they would not realize with some other firms.
Top of the Line Research Tools
Fidelity also has a wide arrange of research, videos, and news sources to help you make more educated investment decisions.
These articles cover topics such as Generally Accepted Accounting Principles and how adjustments to these figures could be useful to how to analyze a company’s earnings for beginners. Reading through this material will help non-finance individuals quickly gain the knowledge to make prudent investment decisions.
Within their Learning Center, Fidelity also technical analysis, charts, and webinars on strategies to implement this type of analysis for those who are interested. Another great resource are free lessons through Fidelity. For instance, the company offers a 6-course lesson on saving for college. The lessons begin with the basics and work through the life-cycle of saving for college from the middle school years all the way to the first year of college. The stock and fund research, personal finance articles, as well as the investment analysis offered by Fidelity represents great value for those who have accounts with the company.
Fidelity Conclusion
Choosing Fidelity as your account custodian will generally be the right decision for most investors who have made saving for retirement, college, and through health savings accounts a priority or are making large enough purchases where the commissions are not a significant part of the transaction.
With Fidelity, you will have the ability to manage your portfolio through dividend reinvestment in individual stocks and funds as well as supplement your portfolio with thousands of potentially commission-free ETF and mutual funds. Fidelity is also a wonderful one-stop shop for those who are looking to learn more about investing and personal finance through their Learning Center online.
As an added benefit, many savers and investors are already very familiar with Fidelity as they are one of the largest 401(k) plan custodians and administrators in the world. Keeping your investment portfolio centralized with a large, reputable player such as Fidelity will be a decision you probably will not regret.
Ally Financial
Ally Financial is a fairly new discount brokerage with similar benefits as Fidelity.
While Ally Invest is fairly new, the platform is born out of the former discount brokerage TradeKing Group that was purchased by Ally Bank in 2016. Prior to Fidelity and Schwab reducing their fees, TradeKing was one of the few brokerages that offered $4.95 commissions.
Rock Bottom Commissions
Similar to Fidelity, commissions are low at $4.95 per stock trade with an addition $.65 per options contract.
Ally Invest also offers a variety of commission-free ETFs through WisdomTree with rock-bottom expense ratios to compliment and round out a well-balanced portfolio. Fees for the nearly 8,000 available mutual funds are relatively low at $9.95. However, compared to Fidelity which offers no-load, no-transaction-fee mutual funds, the price for mutual funds can be beat through an account with Fidelity or other brokerages.
Flexibility in the Types of Accounts Available
Similar to Fidelity, Ally Invest allows individuals to easily open specialized accounts such as Traditional and Roth IRAs.
However, for Health Savings Accounts and 529 Plans, a company like Fidelity would be a better choice as Ally does not offer these types of accounts. If you have these types of accounts or suspect you may in the future, it may be worth the planning to keep your accounts centralized at one broker to avoid the hassle factor of having multiple firms – especially if the commissions are in line.
Research Tools
As far as research, Ally Invest offers a variety of research tools, analytics, and stock and fund screeners that you would expect from a typical brokerage account.
Similar to Fidelity, Ally Invest also offers and Education Center that publishes content ranging from retirement planning to option trading tips and strategies.
Ally Invest Summary
Overall, Ally Invest offers a great platform for the cost-conscious investor who wishes to have a typical brokerage account or IRA.
With a plethora of commission-free ETFs to diversify your portfolio and very low commissions on stock trading and mutual funds, Ally Invest offers a similar value as other discount brokerage firms and full-service brokers.
If you have multiple accounts such as 529 plans, HSAs, as well as a 401(k) and IRA, consolidating everything with a single company such as Fidelity may offer a bit more convenience. However, if you do not mind having different brokers and like the idea of having your accounts spread out among several firms, Ally Financial would be a contender to consider for your IRA or individual brokerage account.
TD Ameritrade
Another great brokerage to consider housing your portfolio is TD Ameritrade which has well over $1 trillion in investors’ assets.
Modestly Higher Commissions
At prices of $6.95 per equity trade and an additional $.65 per option contract, TD Ameritrade is slightly more expensive than other brokerage firms we discuss.
While commissions are modestly higher, TD Ameritrade also provides a wide variety of commission-free ETFs as well as No-Transaction-Fee mutual funds for investors more averse to picking individual stocks. Unlike Fidelity, TD Ameritrade also offers the ability to implement forex and futures trading. However, these are a bit more complicated and riskier for most. Therefore, most long-term, buy and hold investors should probably discount this benefit when deciding which platform is best for your portfolio.
User-Friendly Platform and Research
TD Ameritrade also offers clients any easy to use interface and mobile application that is fairly standard in the industry.
Through TD Ameritrade’s Research and Ideas, investors are able to gain access to certain analyst and market reports to further their knowledge and trading or investing experience. Similar to Fidelity and Ally Invest, TD Ameritrade offers clients the ability to screen for stocks or funds based on certain metrics, analyze potential investments using technical analysis, and peer analysis based on performance, financial data, and industry averages.
Advanced Platform for Traders
If you are a very experienced trader and have greater needs than the online platform offers, TD Ameritrade also offers their thinkorswim platform for after hours trading and forex trading for the more serious trader. This offering makes TD Ameritrade the preferred platform for active traders due to the tools that cater to the specific needs these strategies require.
Other Financial Service Offerings
For those that are interested in credit card rewards, TD Ameritrade offers a generous, no annual fee, cash back card that earns 1.5% back on all purchases with no caps through their TD Ameritrade Client Rewards card.
When $500 is spent within the first 90 days, cardholders will also earn a $100 cash bonus in addition to the points accumulated. Rewards can be redeemed for gift cards, travel, cash back, and even jewelry. Additionally, when redeemed in an eligible TD Ameritrade account, you will receive an additional 10% on your rewards. While the 1.65% cash back in eligible accounts is less than the 2% back offered by Fidelity, there is still a perk for those that are looking for a no annual fee card where rewards can be deposited in your account and invested.
TD Ameritrade Summary
Overall, TD Ameritrade offers a very user-friendly platform and mobile application.
If you’re a beginning investor who is looking to gradually build the blocks necessary to morph your investing strategy into foreign exchange and futures trading, TD Ameritrade offers a variety of tools and research in their next level thinkorswim platform to meet your goals.
With over 100 commission-free ETFs and thousands of no-load, no-transaction fee mutual funds, TD Ameritrade offers a wide variety of options for any level investor or trader. However, at $6.95 per trade, the cost-conscious beginner who does not necessarily need the additional customer service and extras from TD Ameritrade may benefit from a broker offering lower fees.
Schwab
Another great brokerage firm to consider is Schwab.
Low, $4.95 Commissions Per Trade
Similar to Fidelity and Ally Invest, trades can be executed at the bargain price of $4.95 and another $.65 for options contracts. With Schwab, there are no account minimums and over 500 commission-free ETFs to choose in your portfolio. Fairly unique to Schwab, they also offer a satisfaction guarantee which encompasses a wide range of fees and commissions.
Industry Standard Research
Similar to the other platforms discussed, Schwab offers a fairly extensive education hub where clients can gain insights from articles and podcasts ranging from topics on personal finance, retirement planning, estate planning, and investing basics. As an added benefit, Schwab offers a network of physical branches and offices as well as financial advisers and consultants similar to other brokers such as Fidelity.
Check out the Scwab Credit Card issued by AmEx
Like Fidelity and others, Schwab offers a cash-back credit card.
Schwab’s cards are issued by American Express and Schwab Investor Card earns 1.5% back that is automatically deposited into your Schwab account with $0 in annual fees. If $1,000 is spent in the first three months, the account holder will earn an additional $100 statement.
For those that travel internationally, Schwab’s American Express Platinum for Schwab would be another contender to consider. With its introductory offer, these cardholders will earn 60,000 points which can be redeemed for a $750 deposit if $5,000 is spent on purchases within the first three months. With the $550 annual fee, cardholders will enjoy $0 in foreign transaction fees as well as 5x the points booked directly with airlines or with American Express Travel. For those that travel internationally frequently, these perks and benefits can be enticing considering they can be reinvested in your brokerage account.
So, What is the Best Brokerage Firm?
There is no shortage of good choices among the brokerage firms listed above.
Whether you are just getting started in investing and want to dabble with commission-free stock trades through a platform like Robinhood, or you are a seasoned professional looking to venture into the realms of trading futures, each of these platforms offer unique benefits that cater to specific investors.
Robinhood May Be a Match for New Investors but Others May Be Better for Traditional Investors
For the broad audience looking to invest substantial amounts of money over time for retirement or college, any of the major brokers listed above other than perhaps Robinhood would be ideal. While Robinhood is a wonderful free trading platform, the fact that IRAs and other non-individual broker accounts cannot be opened makes it less suitable for these goals. Also, Robinhood does not offer dividend reinvestment programs, and over the long-term this could harm your returns compared to compounding dividend reinvestment.
However, for those looking to get started in buying or trading in a small amount of money or single shares of stock, Robinhood is an excellent platform that will not eat up your meager gains in commissions like Fidelity, TD Ameritrade, or Schwab’s commissions would do to your small dollar purchases. If you already have a relationship with one of these listed above through your 401(k), HSA, or another established account, you may enjoy having any other accounts you are opening under a centralized roof to monitor more easily. Accumulating a large portfolio at a particular broker may also result in lowering fees and commissions or better service after certain thresholds are reached.
Consider Diversifying Among Brokers
If you already have substantial sums and wish to diversify, most of these platforms offer similar services and pricing.
If you still struggle to identify which brokerage firm may be the best for you, consider downloading their mobile applications and visiting their websites to look through the functionality of the offerings. The good news is that even if you feel like you would be better served with another firm, transferring assets is done with relative ease and sometimes, a modest cost. Either way, there is no mistake that cannot be undone, and no decision is final.
The only bad decision to make would be to delay your investing journey any longer!