This is a question that someone asked me recently. Actually, the question was if there’s a Roth IRA that I recommend, but I think that they were essentially asking where to open an account and the answers to those two questions are one in the same. I can see how this could be very confusing for most people.
There are so many options where you can open an account and so many advertisements from companies telling you why they’re the best to use. A Roth IRA is a Roth IRA; there isn’t an advantage from one account to another. The advantage comes from the assets that you’re able to invest in within the account.
Luckily for those looking to open a retirement account (or any other investment account), the large investment companies continue to compete and drive each other’s prices down.
Do It Yourself
There are plenty of custodians with reputable names where you can open an investment account: Schwab, Vanguard, TD Ameritrade, Fidelity, etc. I don’t know all of the specific offerings that each company has, so I’m going to explain more of the general things to look for when determining where you should open an investment account.
Fees
Fees are always one of the top things we need to consider when investing. Why? They are one of the fastest ways to eat up our returns. Which institution you choose to open your account at doesn’t make much of a difference – the assets that the company makes available to you are going to have a much greater impact on your investing success.
You want to make sure that the company that you choose to setup your investment account with provides you with access to good mutual funds and ETFs that have good long-term performance and low fees. Fees can include trading fees charged by the institution where your account in setup, loads on mutual funds, and expense ratios that the mutual funds charge on an ongoing basis.
As mentioned above, the good thing for retail investors is that these companies continue to drive each other’s prices down. In fact, Schwab now offers no-load, no transaction fee mutual funds to retail investors. One thing to keep in mind is that there may be account minimums or monthly contribution minimums that these companies require to open an account and access these funds and low fees. Additionally, you want to make sure that the expense ratio on the mutual funds isn’t high to make up for not charging a load or transaction fee.
However, there are some companies where you can setup an investment account that only allow you to invest in their own mutual funds and ETFs. In general, this should be a no-go. These companies typically charge very high expense ratios and their investments often under perform their benchmarks. Conversely, those companies that I mentioned by name above (this is not an all-inclusive list) allow account holders to choose from the (almost) full universe of mutual funds and ETFs. This means that you can pick the very best investments available, even if they are from a competitor of the company where you have your account.
Custodians for Financial Planners
I work at a fee-only Registered Investment Advisor (RIA) that uses Schwab as a custodian. A custodian is important because it means that we never have control of our clients’ money. Instead, we setup accounts at Schwab for our clients, in their names, which provides us with limited power of attorney to trade their accounts and send money between like-named accounts (i.e. transfer money between their checking account and investment account).
If you decide that you would like to work with a financial planner, they will likely have their preferred custodian where they will ask you to house your assets. Financial planners have chosen custodians because it makes their jobs easier and their clients’ lives easier. The planners are provided with a service team with the custodian, they know all of the processes and procedures to complete various tasks with the custodian, and client accounts are in one place which makes life much easier than if they were scattered amongst various clients’ preferred investment companies.
In addition to working with an experienced advisor, there are additional advantages to opening an account with a financial planner compared to opening a retail account on your own such as more favorable share classes available as well as different mutual fund families that aren’t available to the public.
Please keep in mind that the only check you should ever write to your financial planner is to pay your fees. You should never write a check directly to your financial planner for an account deposit – deposits will always be made out to the custodian for benefit of you with your account number on the payment.
Conclusion
Overall, where you open an investment or retirement account doesn’t make a huge difference. The things that you want to be aware of are the investment choices available to you, the fees that you’ll incur, and the level of service you believe you’ll receive.
