Brokerage and Advisory Accounts: Factors to Consider When Choosing an Account Type

Many financial firms today offer both brokerage and investment advisory services. If a firm provides both types of services, you might be able to choose between having a brokerage account, an advisory account or both.

Whether you're opening a new account or are considering converting an existing account from one account type to another, be sure you understand the differences in the services provided and fees involved. Ask questions before deciding which type of account will best help you achieve your financial goals.

Understanding Brokerage and Advisory Accounts

With a brokerage account, a FINRA-registered financial professional or brokerage firm will accept and carry out your orders to buy and sell securities. They can also make investment recommendations. Brokerage account fees generally are transaction-based, so you'll typically pay a commission or markup when you buy or sell a security. From a cost perspective, you might prefer transaction‐based fees if you don't trade often or if you plan to buy and hold investments for longer periods of time. In addition, many online brokerage platforms offer commission-free trading, though there still may be fees or costs associated with the trade.

By contrast, with an advisory account, an investment advisor typically provides ongoing investment advice. Fees are usually a percentage of the total amount of assets held in your account and are typically charged on a periodic basis, such as quarterly. Investment advisory fees are charged regardless of whether you buy or sell securities. Thus, if you tend to buy and hold investments for long periods and don't actively trade securities, an asset‐based fee might cost you more than transaction‐based fees. However, depending upon how transaction fees are charged, an advisory account might be more cost-effective if you buy and sell securities frequently. You might also prefer an asset-based fee if you want ongoing advice or someone to make investment decisions for you.

The specific services you receive and fees you pay will depend on the agreement you sign when you open your account with the brokerage firm or investment advisor.

Some FINRA-registered financial professionals are also separately registered as investment advisors. When working with a dually registered financial professional, be sure you know which capacity they're acting in to understand what services they're providing and what it will cost.

Both brokerage firms and SEC-registered investment advisors (RIAs) are required to provide prospective clients with a customer relationship summary (Form CRS), which can help you compare the respective services and costs. Form CRS also provides other important information, including disciplinary history, conflicts of interest and required standard of conduct associated with a firm's services.

Choosing what type of account to have is a decision you should make based on your own financial circumstances and goals. How frequently you trade, fees and expenses, and the level of services you want to receive are among the factors to consider.

Unique Considerations Before Converting Accounts

If you're thinking about converting an existing account, here are some questions to ask that might help you decide whether changing account types is right for you:

• What services will be offered to me if I change account types, and how do those services differ from what is currently available to me? After the change, how can I determine whether any additional services are worth any additional costs?
• Given my needs and preferences, which type of account makes more sense for me?
• How do the fees of a different account type compare to what I pay with my current account? Can you give me an estimate of how the yearly fees might differ based on my current account size and my trading history?
• Will I need to sell securities to convert my account? (Note: If yes, this could result in you having to pay capital gains taxes. Consider talking with a tax professional before changing account types.)
• Will I work with the same investment professional? If not, who will handle my account, and what are their qualifications?
• Who can I contact if I have concerns about my account?

Regardless of the type of account you choose, be sure to research any investment professional you work with. Use FINRA's free BrokerCheck tool to research the background and experience of individuals and firms.

Learn more about working with an investment professional.

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