Who’s Managing My Money?
Opening a brokerage account does not mean that your money is automatically invested (unless you have arranged for a transfer of investments you already own from one account to another). If you’re not paying extra to have a professional trade for you, YOU are responsible for buying and selling the investments in your account. When you make deposits, the broker will typically park them in a money market fund where they will earn minimal interest until you buy other securities.
You can set up an account that’s professionally invested, though it’ll cost you more. A “discretionary,” or advisory, brokerage account is managed by a financial professional who has the authority to make investment decisions at will on your behalf. These types of accounts are more common with traditional brokers than discount brokers, and require a substantial amount to open -- usually a $25,000 or $50,000 minimum investment. They also charge a commission per trade and/or an annual fee. If it is a fee-based, or “wrap,” account, you will likely be charged between 1-2 percent of your account value per year to cover administrative, custodial, research and trading costs. That doesn’t cover additional expenses potentially charged by the mutual or exchange-traded funds you might own in your account.
What About Taxes?
It is important to understand that a brokerage account is a taxable account unless it is an Individual Retirement Account (IRA) or 529 college savings account, in which case you benefit from tax deferral (or tax exemption in the case of Roth IRAs, assuming certain requirements are met). This means that you can owe annual taxes on your investments, especially if you sell securities that have grown in value. So you should keep track of what you originally paid for each security in your account (aka “cost basis”) and understand what the capital loss or gain might be before selling.
How Do I Set Up Contributions?
The best way to fund a brokerage account and grow your money is to set up automatic monthly transfers from a savings or checking account, which you can usually do online or by calling or visiting your bank. You might also be able to set up automatic investing of your deposits in certain mutual funds. It’s worth the effort to set these up. Taking these steps will you force yourself to save your money rather than spend it and allow you to take advantage of monthly compounding that can significantly boost your return over the long term.
Bottom Line: Whether you are committed to saving money through DIY investing or you’re willing to pay extra for professional help, make sure you do thorough research and understand all potential costs, requirements and restrictions before opening any brokerage account.