Do you want to know your options for investing to reach your long-term goals? Remember that investing is only appropriate if your living expenses are covered, your debt is under control, and you have built an emergency fund. After that it may be time to consider long-term investing.

This blog covers two of the major types of “stores” that specialize in investments – brokerage firms and investment (mutual fund) companies.

If you’d like to learn more about Saving for Short-Term Goals, check out my blog on the topic.

Brokerage Firms

The widest selection of investments is available through a broker-dealer, or brokerage firm, a company in the business of buying and selling investment products. A broker-dealer may be a person, a company, or another organization. They may sell their own products, and then they are called a dealer; they may sell products from outside sources, and then they are called a broker.

Fees or charges associated with a brokerage account vary widely. Some firms do not charge a transaction fee to buy or sell a stock or exchange-traded fund and some do, but then it may be on a scale.

Some firms charge for ongoing management of your account. If you choose to work with an advisor that is independent of a brokerage firm, a Registered Investment Advisor (RIA), they will open an account for purchasing securities at a brokerage firm. (Madoff brought this necessity to the attention of the public).

In any case, it is important to get a clear picture of all fees and/or expenses when you interview a prospective broker or advisor and make sure they act as a fiduciary. (My blog, Should I Hire a Financial Advisor, has more on this topic.)

Some investment products can only be purchased or sold through a broker-dealer – stock or ETFs for example – because membership on an exchange is required, which is costly. The largest U.S. broker-dealer firms are names that you recognize: Fidelity Investments, Charles Schwab, or Edward Jones, for example. They are not the only players in the broker-dealer world, however.

Independent broker-dealer firms were created for financial advisors who hold securities’ licenses but want support for only a limited number of services, such as compliance and trade execution. Independent broker-dealers usually allow their brokers more freedom in how they do business.

If a broker has a strong client base that generates enough steady income to cover the brokers’ individual marketing and overhead expenses, then this business model might be attractive to the broker. The largest independent broker-dealer in the U.S. is LPL Financial. Others are Ameriprise Financial Services, Raymond James Financial Services, Commonwealth Financial Network, Northwestern Mutual Investment Services, and MML Investors Services.

Investment Companies

A totally different type of entity for investing is an investment company. Several types of investment companies exist, but the most common one for investors is an open-end mutual fund company. Each investment company typically creates a wide variety of mutual funds, but some specialize in certain types of investments.

PIMCO initially specialized in bond mutual funds, for example, but has expanded its offering to stocks, commodities, real estate, etc. An investment company creates mutual funds.

You can usually buy mutual funds directly from the creator investment company, but not always. Some mutual funds are only offered via a broker-dealer, and then the brokerage company may charge a transaction fee. In addition, some mutual funds may charge the investor a fee called a “load” when buying or selling certain types of mutual funds.

Loads may be charged when you buy a fund (front-end), when you sell a fund (back-end) or over the duration of ownership (level). The purpose of a load is to pay a broker or advisor for their services. You can avoid this fee by purchasing a no-load fund or by buying directly from a mutual fund company.

However, even if you buy directly from a fund company, they may charge a “12b-1 fee.” This fee pays for the mutual fund company’s own marketing and promotion expenses. The fee will be deducted as part of the total mutual fund expenses before the fund’s net asset value is computed. It is an ongoing expense. Please be aware that any sales charges, fees, or expenses reduce the return of your investment so pay attention to them and avoid them when you can.

Some of the largest domestic investment companies creating mutual funds are BlackRock Funds, Vanguard Group, Charles Schwab, Fidelity Investments, State Street Global Advisors, PIMCO/Allianz, J.P. Morgan Asset Management, and Capital Group Companies. Some may be familiar because they have related broker-dealers. Many also create exchange-traded funds.

It is possible to construct an entire investment portfolio with purchases of mutual funds from one investment company. Sooner or later, however, you will probably want more diversity. Choices are good. The easiest way to buy mutual funds from many, many different investment companies is via a brokerage account at a broker-dealer. If the performance is similar, choose a no-load, no transaction fee mutual fund.

Confusing Relationships

Are you confused? You may have noted that some of the broker-dealers listed earlier are also on the list of investment companies creating mutual funds. Fidelity, for example, creates mutual funds which can be purchased via a Fidelity brokerage account. Those two functions, however, must be kept entirely separate. They have different requirements, rules, and regulations.

Places to saveand invest can also be related; for example, Bank of America (a bank) and Merrill (a broker-dealer). Bank of America and Merrill are separate entities or subsidiaries of the same corporation. Again, the functions must be kept separate and have different requirements, rules, and regulations.

Word of Caution

One cautionary word about saving and investing providers. When you go to a store to shop for a new pair of jeans, what else do you see? Stores are good at strategically placing items to entice you to buy what you do not need. That is one of the goals of marketing: to try to convert a want into a need.

Remember the difference between needs and wants? Some financial “stores” may also try to get you to buy financial products you do not need. That is called cross-selling, it is common, and it is not bad unless you allow it to control your choices – and there are many choices for both saving and investing. The more you understand yourself and are clear about your goals and risk tolerance, the more focused you can be on the type of products that truly fit your needs.

Almost all saving and investing providers have an online presence, but some may not have an office near you. If face-to-face interaction is important to you, consider those with offices nearby. Some will offer products or services not available at others. The larger companies will typically have a wider selection but may not offer the personal level of service that you desire.

Which do you prefer?

Let’s Have a Conversation:

What types of investments do you use – stock, mutual funds, etc.? Which do you prefer? Why?