Who should you invest with? (8/12/05)

As I glance through my list of recipients, there's a lot of you at an age where you are beginning to think about investing. I'm not an investment guru, so don't expect any hot stock tips from me. This story will inform you about who to go to for your investment needs. For example, what's the difference between Ameritrade and Harvey the stock broker. I'll go into each type of intestment professional and what their specialty is and when to choose them for your investment needs.

Stock Broker
What is a stock broker? A stock broker is essentially a person licensed to buy and sell securities (a security is stocks, mutual funds, etc). They work as representatives for a brokerage firm such as Edward Jones or Merrill Lynch. If you have a pot of cash and want to purchase stock, mutual funds, bonds, treasury bills, etc., they can purchase them for you. You pay them a transaction fee for each transaction they do for you. The fees typically vary based on the amount you purchase and the type of investment you purchase.
Pros: The benefit of using a stock broker is human interaction. In the increasing world of online brokerage services, some consumers enjoy having someone they can call or visit to make investment transactions.
Cons: Stock brokers charge higher transaction fees than online brokerage services and their licensing regulations don't allow them to give advice. However, because online brokerage services are threatening to put all stock brokers out of business, the regulators have been more lenient on their ability to give advice so they can be more valuable. Another disadvantage to using a stock broker is their motive. The more transactions they do for you, the more fees they collect. Therefore, they sometimes purchase a lot of crap you don't need or want. Many customers have come to me with their 250-page monthly statement from their broker with a really confused look on their face.
In a nutshell: Use a stock broker if you're a novice. They can explain to you how the process works and make it a very pain-free experience. But beware. If you're a novice, some stock brokers love to take advantage of easy prey. Be sure to use a reputable one or get a referral. I know a few very smart, well-spoken and honest stock brokers. If you're planning on using a stock broker, you can do a background check on them by going to http://www.nasd.com/. This is the watchdog for investment professionals.

Online Brokerage Service
What is an online brokerage service? There's a ton of these. Even large brokerage firms such as Edward Jones and Charles Schwab now allow customers to make transactions online. They are typically very easy to use and offer a number of online tools for company research, market news, and stock comparisons.
Pros: Transactions are typically cheap, sometimes as a low as $6 per transaction. If you're into doing your own market research, they will provide access to some great tools.
Cons: If you have a question, good luck. You're basically on your own. I had a good experience with the online brokerage service I used, but I've heard some nightmare stories.
In a nutshell: Make sure you know what you're doing and use a service that has a good customer service department. Be sure to read the fine print. The transaction charges may be small, but they may access a monthly or annual account maintenance fee. They may even have a minimum balance requirement or a minimum number of annual transactions you must meet.

Trust Company
What is a trust company? A trust company is a fiduciary that offers a wide range of specialized services, including accounting, investment, and estate planning services. This is typically for people with higher investment accounts and have specific trust documentation that requires additional regulations. Minimum investment is typically $500,000 so I won't go into this in great detail. However, it is closer to my heart since I work for The Commerce Trust Company.
Pros: Combines the resources of attorneys, trust administrators, financial planners, accountants, and investment analysts all in one place and charge a single, flat fee based on the amount of assets in your account. The cost of using each of these professional individually would cost a lot more money. Perhaps the greatest advantage is unbiased advice.
Cons: Not cost effective until you have a much bigger pile of loot.
In a nutshell: If you have a lot of money, a trust company is an easy choice to make.

There are other terms used to describe people that perform the same tasks listed above, such as investment professionals or securities traders (they're all the same). These are the three primary ways to invest in marketable securities. I want to make sure you're aware that investing with any of these investment entities involves some level of risk depending on how you invest your money. Any marketable security is subject to market risks and you could loose some or all of your money. We've all heard stories about day-traders that make a lot of money in one stock of a very short period of time (sometimes in one day). This is a very risky hobby and typically takes a lot of money to get big gains. Investing in the stock market should be a long term (greater than five years) strategy for savings.