 Personal Finance PowerPoint Presentation, brokerage account. Prepare to get financially fit by practicing personal finance. Most of this information comes from Investopedia. What type of brokerage account is right for you, which you can find online. Take a look at the references, resources, continue your research from there. This is by Adam Hayes, updated February 17, 2022. In prior presentations, we've been taking a look at investment goals, investment strategies, investment tools, keeping in mind the two main categories of investments. Fixed income, such as bonds, equities, such as stocks, also keeping in mind some of the major tools that we might utilize for investments, such as mutual funds and ETFs helping us to diversify. So now we're looking at what type of brokerage account is right for you. A broker, also known as a Broke Ridge, is a company that connects buyers and sellers of investment vehicles like stocks and bonds. A brokerage account is often where investors keeps assets. In general, there are three types to choose from. Which type you choose as a matter of your needs and preferences. So we've got the quick history of the brokerages to get some background, some understanding of them. Before the middle of the 20th century, access to stock and bond markets was restricted to those with enough money to invest and use a human broker's services. So notice if we think about the companies themselves having a separate legal entity was a huge kind of innovation to help grow companies and generate capital. Then the creation or the idea of having stocks or breaking out the ownership into uniform units also made it a little bit easier for thinking about buying and selling stocks, putting those stocks say on an exchange helped give more transparency to the stocks that could be basically traded at that point in time as well. So notice as the exchanges became more efficient and more tools were put in place such as mutual funds and ETFs for example, that gives a lot more access to individual investors who are not professional traders or do not have enough money to say hire a professional investor acting on their behalf and they can take smaller amounts of money, for example, and still have some diversification within the market. So these have been huge innovations for both benefiting the companies themselves, generating more capital for more people, getting more money, more investment and for individuals who can now invest at an affordable rate even with a little amount that they need to invest with. So in the 1970s and 1980s, quote, discount in quote brokerage firms such as Vanguard and Charles Swab emerged. They were willing to take on less affluent clientele because their business bottles were designed around investor volume. So at that point in time now you've got these tools, Charles Swab and Vanguard that are making it more affordable and targeting this huge market of people that could invest but can't do so with the larger dollar amounts. Therefore they're going to make money on the volume of course of the trades or the people investing. So online brokerages such as eTrade4x.com and Ameritrade, now TD Ameritrade under Charles Swab, flourished as they seized the opportunity created by the internet at the turn of the century. So clearly we've got more connectivity than these platforms are going to allow us to basically connect people of both sides of the transaction. We've seen that in all kinds of places, right? These platforms are now able, like the Silk Road, to connect buyers and sellers which should increase prosperity all around. So new technology reduces costs and allows them to extend the discount brokerage model by reducing commissions and minimum balances. The risk of self-direct investing. Online brokerage accounts brought about the self-direct investor. The investor conducts investment research and chooses which stocks and bonds to buy for their portfolio. So now of course you've got individuals that are, if you're good at being self-reliant with these kind of tools and doing your own research, these tools are great. But of course now you have less basically professional guidance to some degree and you're utilizing some of these tools. Again, some of these tools can still kind of give you access in other ways such as purchasing mutual funds and ETFs or possibly index funds that are going to help to pool and manage those kinds of funds. But in any case, in addition, a new development over the past few years has been the advent of the robo-advisor. These automated software platforms often available as mobile apps take care of nearly all your investment decisions at reduced costs. Arguably the first robo-advisor and first to offer cryptocurrency portfolios betterment launched in 2010 after the Great Recession. So since then robo-advising has seen exponential growth in adoption and a flurry of startups and existing brokerages adding a robo-advisor arm. Human brokers and financial advisors. So we've got the human touch here on the human side. Some people prefer to have a human handle their finances. So clearly often a lot of people are going to say, hey, I would like to talk to an actual human being here about my finances. Of course doing so means that if you got that personal advice, you're typically going to be paying for the personal advice. So you want to make sure that the pros and the cons are weighed. So if this is you, then a traditional advisor may be a better fit than a robo-advisor. Note that the robo-advisor and some of these mutual funds that might maybe are targeted for things like retirement, helping you to kind of automatically balance your portfolio, for example. These kind of things are set up based on general assumptions about long-term trading. So for example, if you're putting money away and you're trading for retirement and you put your money and say like a targeted fund or something like that, then that fund may be able to kind of rebalance your portfolio as you get closer as the time horizon gets shorter towards that goal, that retirement goal. The robo-advisors are going to use these common kind of heuristics, these common tools for long-term investing typically and try to give you advice on what kind of balancing you should have. Now those are usually the same kind of tools that human advisors are going to be based on as well, but of course a human advisor can expand on it and possibly explain it in a more sufficient manner. But there's a question as to whether a human advisor, someone managing the portfolio, could be say a robo-advisor or a targeted mutual fund over the long run and do so. And do so in such a way that they also clear the added costs related to that advice, right? So that's the question often time. Human brokers and financial advisors have been around since the beginning of modern stock markets and they're carved out-space in today's competitive landscape by catering to investors with a high net worth or those who prefer human interaction. Now as your income goes up, just in terms of cost and reward, the human investor could be more and more beneficial because your investment strategy is going to become more and more complex. You've got more money that you can basically be investing and you're going to have tax consequences that are going to be more significant and you might have estate planning consequences, meaning you might need a human expert actually talking to other professionals such as your CPA, your accountant for example, and your lawyer or whoever's helping you out with your state planning, for example, who also might include your CPA to limit your taxes on that kind of thing, so it gets more complex. Good financial advisors build and monitor investment portfolios and offer advice in many aspects of their clients' financial lives. They also provide auxiliary services such as insurance, estate planning, accounting service, and lines of credit. Customers of these brokers can expect to pay 1% or more of their assets under management to advisors. Sometimes they may pay up to $50 per trade for individual transactions. Many advisors claim that these fees are well worth the extra value they bring, such as picking stocks for their clients' portfolios, accessing unique products, and offering or building comprehensive financial plans. When comparing brokerages, pay attention to what the advisor is telling you. The brokerage may require them to push pre-package investment funds or financial plans. If this is the case, make sure you ask about building a plan that fits your needs. So clearly the brokerage is going to basically be using, you would think the same kind of heuristics that like a robo advisor would basically kind of use, but try to tailor it to your particular needs. So also pay attention to fees. If they're charging more than 1%, ask why and judge for yourself whether the extra cost is worth it. Professional certifications such as CFP Certified Financial Planning, Planner, or CFA Certified Financial Analysis, Designate Nation show that your broker has been trained and has passed a series of rigorous exams related to financial markets and planning. So you can look at their credentials and say, okay, does that line up to have some, you would give at least a minimum level of competence related to those credentials. So you could also use the FINRA's broker check tool to see if their broker has been subject to regulatory complaints or ethics violations. Online self-direct broker accounts. So online self-direct platforms include E-Trade, TD Ameritrade, Robinhood, and many others. So be sure to check your bank. You may already have access to a self-direct online brokerage account. So the first place you might want to go if you're thinking about making some trades is to talk to your bank. For the most part, these platforms leave it up to you to figure out which investments are best, but they typically offer a suite of research and analysis tools. So these kind of platforms you would think then are going to say, hey, look, the trading is up to you. We are a platform basically connecting two people together that want to basically make the trade. They're not going to give you the direct investment advice because they're trying to, they don't want to get sued, right? Their function is to act as the intermediary to facilitate the trade. And of course, they might give you the research that you can do the research with. So many provide expert recommendations and insights to help you make informed decisions. You are then on your own to execute the trades to bill your portfolio through their website or mobile app. These platforms charge a per transaction commission, per stock trade, and extra per options contract. In addition, they let you trade on margin and create options strategies. So on margin, you're kind of like taking a loan to make the trade so that it's like a more complex trade. You're kind of leveraging yourself so you want to make sure you know what you're doing if you're doing that kind of thing. So you can also invest in mutual funds, individual stocks, foreign exchange, forex, and exchange traded funds. Those are the ETFs. Online brokerages are best for the self-direct investor who knows about the markets or conducts research to choose a portfolio best suited for their goals. If you're only going to make a few trades a year, you may want to pay a little more per trade to get access to higher quality research and analysis. If you're a day trader, you'll probably want to consider a site that gives its most active users free trades. We got the RoboAdvisors. The RoboAdvisors automate investing and use technology to manage your portfolio. Since Betterment launched in 2010, there has been a proliferation in startups and existing financial companies offering this algorithmic trading service. Unlike the trading algorithms that power the high-frequency trading, those HFT desk at hedge funds and banks, RoboAdvisors are likely to put your money to work using low-cost indexed ETFs. So the index funds are kind of tied to the average kind of funds. That's how we get an idea of the feel of different sectors. They have these, the indexes are kind of like trying to average by sector. In fact, the convergence of ultra-low-fee ETFs with low-cost technology solutions available on mobile platforms make RoboAdvising possible. Before RoboAdvisors, if you had only a few hundred or a thousand dollars to invest, you'd have to go online to a self-direct platform. Now you can put 200 or 2,000 to work without having to conduct any investment research, pick any individual stock, or worry about rebalancing your portfolio. Algorithmic-based RoboAdvisors aim to place you in an efficient and diversified passive portfolio. Many of these platforms will even tax-optimize your portfolios with tax loss harvesting or a process by which an investor sells losing positions to offset the capital gains generated by winning positions. So in other words, you're going to use kind of this automated type of system to help kind of optimize your portfolios possibly with the use rather than managed funds like index funds and mutual funds. And ETFs are going to use those index, those average funds, and they may even be able to help out with like those more complex strategies, typically of taking tax advantage kind of strategies. If you have capital gains, for example, you might be able to sell some stocks that have a loss to help to cancel out the gains possibly giving you a good tax strategy. So the algorithms themselves are a proprietary company secret of RoboAdvisors. RoboAdvisors are ideal for a new or young investor who don't have much to invest. These platforms are also suitable for people who are fans of passive investment strategies because your RoboAdvisor develops a portfolio of indexed ETFs on your behalf. RoboAdvisors also shine for those long term investors who lack the time or desire to research and find the ETFs that meet their investment needs and strategies. But RoboAdvisors are certainly not for everyone. Many brokerages are adapting their RoboAdvisors to allow for more customization in their portfolio choices. However, this defeats the purpose of these products to build and maintain a growing portfolio. If you choose a RoboAdvisor, the factors to consider are primarily cost, reputation, and added services. Ensure you monitor the cost of extra services, some are free, but others might add extra costs.