The Perfect Broker

By | March 14, 2017

The perfect broker doesn’t exist. But, of course you knew that. In my quest to pursue a dividend growth portfolio, I am faced with the choice confronted by every other investor. Which broker to choose?

There are many different criteria to choose from. It’s important to evaluate the pros and cons of each broker before making your choice. This post isn’t so much a comparison between brokers. There are other resources available online for that.

The following is a discussion on some of the criteria that I consider when choosing the perfect broker. While the information presented is my personal opinion, hopefully, it will help you make your decision or at least reaffirm the decision you’ve made in choosing a brokerage firm.

For me, the perfect broker would have the following capabilities:

  1. Automatic Investments
  2. Fractional Shares
  3. Free – no cost trades
  4. Free Dividend Reinvesting
  5. Stock Options, Forex – ability to invest in these asset classes
  6. Taxes – works well with Turbo Tax

Let’s discuss.

1. Automatic Investments

I want the ability to automatically invest the cash from my paycheck. Call me lazy, or call me smart. But, I want to be able to have money taken out of my checking account automatically. Then, that money should be deposited into my brokerage account. Then, automatically, the money should be taken from my brokerage account to purchase stocks.

Unfortunately, this form of automatic investing rarely exists today. While many discount brokerage firms allow you to automatically invest in mutual funds and index funds, very few allow you to automatically invest in stocks. In fact, the only two brokers I can think that allow this option are Capital One 360 (formerly Sharebuilder) and Loyal 3.

Capital One 360

Capital One 360 has an automatic investment option for investors. As of today’s writing, for $3.95 per trade, an investor could automatically invest in stocks. The downside is that they only purchase the stocks on Tuesdays. So, unlike regular trades, which can occur anytime, you’re limited to purchasing stocks on Tuesdays using this method. However, since I’ll be investing in the long haul, that doesn’t bother me too much.

Finally, one of the benefits to using Capital One 360 is that an investor can invest in any of the stocks in the stock market. For the three main stocks that I would be looking to invest in (Apple, Coca Cola and Realty Income), they are all available using Capital One 360.  I am mindful of the lack of diversification that exists in investing in only three stocks. That’s a topic for another post. Eventually, I will grow my portfolio to have a more diversified set of holdings. But for purposes of this post, I’m exploring my concept of the perfect broker whether I have three stocks invested or thirty. For automatic investing of stocks, Capital One 360 is as close to perfect as it gets.

Loyal 3

Loyal 3 is another option. Like Capital One 360, investors can automatically invest in stocks using Loyal 3. As long as the purchase price for the stocks is as least $10, you’re good to go. However, investors are VERY limited in the number of stocks they can purchase with Loyal 3. In fact, of the three starter stocks in my dividend portfolio, I can only invest in two of them using Loyal 3. Apple and Coca Cola are both available, but Realty Income is not.

This comment is going to sound crazy, I know, but I don’t like Loyal 3 for a couple of other reasons. First, I hate the name. Names are important to me. I own a Kawasaki Ninja 650R. One of the main things that drew me to that motorcycle was that “ninja” was part of the title. I guess I can understand how Loyal 3 got its name, but I just don’t identify with it.  The other more substantive reason is that Loyal 3 has not been around for a very long time. There’s a trust factor there that’s preventing me from joining the bandwagon. But, even if I were to look past the name, and relatively short track record of Loyal 3, I still can’t invest in Realty Income.

However, you may not have those limitations. If automatic investing in stocks is important to you, you should definitely consider Loyal 3.

2. Fractional Shares

The perfect broker should have the ability to allow you to purchase fractional shares. This is consistent with the ability to automatically purchase stocks. Most brokers allow you to automatically reinvest your dividends, and if you receive a dividends, that dividend may purchase fractional shares of a stock.  That’s good and important. However, I also want to purchase fractional shares of stocks. So, let’s say that Coca Cola is trading at $40 a share, and I have only $50 to invest. If I used a broker like Charles Schwab or Fidelity, or even Robin Hood, I can only purchase one share of stock. The extra $10 will be sitting as cash in my brokerage account. I would have to wait until I have another $30 before I could buy another share of Coca Cola, assuming the price of Coca Cola never changed.

If I’m using a broker such as Loyal 3 or Capital One 360, my $50 will purchase 1.25 shares of stock. That way, I have all $50 working for me and not just $40.  I hope that makes sense.

3. Free – No Cost

This one is easy. The perfect broker should offer no commission trades on stocks. So, no cost to buy or to sell stocks. Robinhood is a perfect example. Robinhood is simple and easy to use. I purchase stocks using my mobile phone and it doesn’t cost me a thing. I’m not sure if there is another broker out there that is completely free like Robinhood.

There is a trade war going on between Charles Schwab and Fidelity over commission costs. For more information, visit this article on the subject. Even though there is a race is to zero see which broker can offer the cheapest commission costs, there’s no beating zero. That’s what Robinhood offers.

4. Free Dividend Reinvesting

Almost all the discount brokers offer free dividend reinvesting. The idea being is that if you invest in stocks (or ETFs, mutual funds, index funds), you may receive a dividend. That dividend is then reinvested into the stock for free. Although many brokers offer free dividend reinvesting, not all do.

Robinhood, for example, doesn’t. Dividends you receive from Robinhood get put back into your cash account. True, you can manually use this dividend to purchase additional shares of the same stocks. In fact, some investors prefer this approach so that they can use the dividends to purchase shares into the stocks of their choice – not necessarily the same stock that paid the dividends. But that’s not me. I prefer to reinvest dividends in the same stock that paid it.

The reason is that I’m lazy. I want to set it and forget it. I know that’s not necessarily the best approach, but I like the passivity of it. Even though I’m a buy and hold investor with dividend growth investing, it doesn’t mean I’m neglectful. I’ll keep an eye on the market every now and again. I’ll see how my portfolio is doing. If a company I’m invested in slashes its dividends, then I might have to re-evaluate whether I should continue to invest in that stock. But, having a broker that automatically reinvest my dividends means that’s one less thing I have to worry about. Especially, since I’m not good at picking stocks in the first place, or even figuring out which is the best stock that should receive the dividend.

5. Stocks, Options, Forex

Most, if not, all brokers allow you to invest in stocks. Brokers such as Loyal 3 even gives you the option to invest in IPOs. But, not all brokers are created equally. Some brokers allow you to invest in options, while other brokers allow you to invest in both options and the foreign exchange (forex) market. A perfect broker would enable investors to invest in any asset class, to include commodities. When choosing a broker that’s right for you, it’s important to know what asset class you want to invest in.

For my dividend portfolio, I’m mainly interested in stocks. However, I’m also interested in trading options. So, while I like the fact that Robinhood allows me to trade stocks for free, I would have to choose another broker if I wanted to trade options. That’s because Robinhood does not allow you to trade options, at the time of this writing.

TD Ameritrade allows you to trade all three asset classes, but the cost per trade is generally higher than other discount brokers. Having several brokers to choose from is great. A health competition amongst brokers is good for the individual investor. Still, it’s too bad the perfect broker doesn’t exist.

6. Taxes

Ahh taxes. Tax season is upon us. When choosing a broker, or investment strategy, it’s important to consider not just the tax implication, but the mechanics involved in filing taxes.  If you’re an accountant, this might not be a big deal to you. But, I’m not. I want the filing of my taxes to be easy. For me, this is very important.

Take for example Computershare. Computershare is not a broker, but a transfer agent. So, one way to build my dividend portfolio is to invest in direct reinvestment plans or DRIPs. That is, you can buy stock directly from the company, usually through their transfer agents, such as Computershare. While there can be costs associated with the purchase of stocks while participating in DRIPs, there are also no fee DRIPs. Computershare has many of the components of a perfect broker. Computershare offers automatic investing, fractional share purchases, no cost trades, free dividend reinvesting of stocks. An investor can’t trade options or forex using Computershare.

But, one of the reasons why I use Computershare is because I also use Turbo Tax to file my taxes. Computershare is one of the partners to Turbo Tax. This means that when it comes time to file my taxes, I can automatically upload the information to Turbo Tax. I don’t have to manually enter the data. Again, call me lazy if you want, but I think that’s the best way to go.

DRIPs

There was a time when I invested in DRIPs using Computershare when Computershare wasn’t a partner with Turbo Tax. I had to manually enter the data in Turbo Tax and that sucked! I literally sold ALL of my shares out of Computershare BECAUSE I couldn’t upload the information like other brokers such as Sharebuilder (now Capital One 360). Today, brokerage firms (and I think companies like Computershare) are required to track your cost basis. So, maybe filing taxes would be fairly straightforward even if you had to file it manually. Even then I would still prefer to do it automatically.

So, why isn’t Computershare the perfect broker? Well, for starters, it’s not a broker. As I mentioned, you can’t trade options or forex. Also, Computershare is only a transfer agent for a select number of companies. Realty Income is one of my favorite companies to invest in. However, I can’t invest in Realty Income using Computershare. Wells Fargo Shareowner Services is the transfer agent for Realty Income.

The problem? Well, I can’t invest in Coca Cola using Wells Fargo Shareowner Services because Computershare is the transfer agent for Coca Cola. But, more importantly, as of right now, Wells Fargo Shareowner Services is NOT a Turbo Tax partner! So, come tax time, I would be right back in the same position I was years ago when I had to manually enter the information in Turbo Tax. That is one of the main reasons why I haven’t signed up to participate in Realty Income’s DRIP.

REITs

But, there’s another reason that’s also related to taxes. Realty Income is a real estate investment trust (REIT). Taxes on dividends you receive on REITs are treated differently than the taxes you receive on a regular stock like Exxon Mobile. So, according to the FAQ on Realty Income, dividends are “substantially taxed as ordinary income and your tax bracket determines the amount of taxes you pay.” That’s what’s known as an unqualified dividend. This is in contrast to the dividends I receive from Apple or Coca Cola. Those are taxed at the current capital gains rate of 15%. There are rules about how long you have to hold the asset for etc, but that’s outside the scope of this post. For more information about the differences between qualified and unqualified dividends, see this Nasdaq article.

The point being is that I’m hesitant to invest heavily in Realty Income, even using their transfer agent, because of the unfavorable tax treatment. However, if Realty Income was held inside of a retirement account (such as a ROTH IRA), then you wouldn’t have to worry so much about the tax treatment.

CONCLUSION

Clearly, the perfect broker doesn’t exist. But, when choosing a broker, an investor needs to consider the capabilities and limitations of that broker. There are many other aspects of choosing a broker that is not covered by this post. These include customer service, research tools, platform, etc. To find the right broker, you have to first decide which attributes you value and which you can live without. Rank and stack and then make the decision.

Also, because you have so many options, you don’t have to stick with one. In fact, it’s probably a good thing to diversity brokers in case one broker were to fail. In future posts, I’ll discuss which brokers I use and why.

Hopefully this post was helpful to you. What do you think? What are some of the important things you look for in a broker? Indeed, what is your perfect broker like?

13 thoughts on “The Perfect Broker

  1. Dividend Diplomats

    DP –

    Nice article. I look for low trading costs, easy platform that offers flexibility. Further, I like FREE DRIP and Fractional shares. I have used Capital One’s Sharebuilder program for more than 5-6 years now and I do absolutely love it and plan on staying with them for the foreseeable future. Thoughts on them overall?

    -Lanny

    Reply
    1. Data Lore Post author

      I was going to explain my decision in another post because I didn’t want to make this post super long, but Capital One’s 360 is the best broker that suites my needs at the moment. Like you I like the DRIP and fractional shares capabilities of Capital One 360. I also like the fact that I can use them with Turbo Tax and I don’t have to worry about filing my taxes at tax time.

      Reply
  2. DivHut

    Totally agree. The perfect broker does not exist just like the perfect portfolio does not exist either. It’s all a matter of personal goals and finding the right broker/portfolio to suit your personal needs and risk tolerances. If I was a new investor with very, very little cash on hand I’d go with Loyal3 to start. Now I use Capital One’s Sharebuilder since I became a dividend growth investor and have no plans to leave. I have a special commission rate of $2 a trade under a promotion Sharebuilder had for Costco members. At that rate they’ll continue to hold me. Thanks for sharing.

    Reply
    1. Data Lore Post author

      No worries DH. Actually, that’s my biggest concern right now with Capital one 360 (Sharebuilder). I don’t mind the $3.95 a trade for automatic investing, but if I have 10 stocks to invest in, that adds up really quickly. They used to have the Advantage program for $12 a month up to 12 trades, which is good if I had about 3-12 stocks to invest in. But, it’s difficult to have a broadly diversified portfolio of stocks at $3.95 per stock. Now, since I have 2-3, it’s not overwhelming, but I’m thinking long term for when I want to increase the number of stocks I own.

      Reply
  3. Pingback: Capital One Investing Review - Dividend Portfolio

  4. Troy @ Market History

    Since my orders tend to be really large, I’m looking for the broker with the lowest commissions. Even using the online brokers, my commission can run into the hundreds of dollars per trade.
    Besides commissions, I’m also looking for a broker that has great charts and a ton of market data.

    Reply
    1. Data Lore Post author

      Troy, what about Robinhood? The commissions are free and you can get charts and ton of market data from other websites like yahoo finance. Just a thought. But thanks for stopping by.

      Reply
      1. Troy @ Market History

        I heard about that. But I’ve always thought that it was too good to be true. How do they make money?
        I heard that they might consider giving market data to the HFT firms (like in Michael Lewis’ book Flash Boys). That’s essentially just a hidden way of charging you a commission.
        They might send any of your buy/sell orders first to the HFT before they send it to the exchanges. Then the HFT will frontrun your order and profit off of your order. Then the HFT pays the broker a commission.
        It’s all kind of shaddy. I just think that Robin Hood seems too good to be true.

        Reply
        1. Data Lore Post author

          I won’t pretend to know the inner workings of Robinhood. I’ve been using them for less than a year but have had no complaints, other than I wish they offered other services such as automatic investing and fractional shares. However, I definitely would not recommend anyone to invest with any firm they aren’t comfortable with.

          Reply
  5. Rohit

    Thanks for sharing the post. The way you narrated the post is good and understandable. After reading this post I learned a lot of new things about stockbroker. Please let me know for the upcoming posts.

    Reply
  6. TradingGator

    It’s certainly so that your broker, in an ideal world, could help you with all asset classes. However, in my experience most of them are niche oriented shops. Equity guys don’t like bond desks and options guys think in terms of math equations instead of classic fundamental analysis. The closest thing would be CFD trading. But then again, that’s more like derivative trading and not good ol’ fashion investing for the long-term.

    Reply
    1. Dividend Portfolio Post author

      Fair point TG. It’s hard to find the perfect broker. By the way, I like your name.

      Reply

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