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What Is a Stockbroker?

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone and is not intended to be a source of investment advice. It may not have not been reviewed, commissioned or otherwise endorsed by any of our network partners or the Investment company.

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A stockbroker is someone who buys and sells stocks and other investment securities for a person or a company. They can also handle transactions for themselves.

To determine if someone is a broker, look at their day-to-day responsibilities. If they are involved in executing or handling securities transactions, they’re most likely a stockbroker.

What does a broker do?

A broker handles the transactions of securities – whether negotiation or execution – and receives a fee when the transaction is complete. A broker does their work on behalf of someone else, whether an individual, a firm or another business.

Brokers have a range of duties, including, but not limited to:

  • Serving as financial consultants
  • Aiding as investment advisors
  • Finding buyers and sellers for securities
  • Gauging investor interest in specific securities
  • Evaluating market securities in various products, including real estate, annuities and other securities
  • Facilitating transactions
  • Handling funds through securities transactions

Brokers can be individuals or brokerage firms. Firms have a wide range of services and staff, ranging from small boutiques to large operations. Many large banking institutions offer brokerage services. Bank of America, for instance, offers checking accounts and investing opportunities so all of your money is under one umbrella institution.

Brokers and dealers can act in tandem, often referred to as a “broker-dealer.” A broker-dealer buys and sells securities on behalf of a customer (broker) for their own benefit (dealer).

What fees do brokers charge?

Stockbroker fees vary based on the type of brokerage you choose. If you have a robo-advisor, for example, your fees will be much lower compared to someone who uses a human financial advisor and a full-service brokerage. You may face very different fees between the same type of brokerage firms, too.

Some of the best brokers don’t charge trading fees or have account minimums, giving you an easy way to start investing for a minimal cost.

Average Cost of Broker Fees in 2020
Fee TypeAverage Cost
Trading fees$0 to $10
Account (or annual) maintenance fees$0 to $50
Account closing or transfer$0 to $75
Paper statementsAbout $2 per statement
Wire transfer fees$15 to $30

You might see other types of fees, like sales load fees. Stockbrokers charge sales load fees based on sales commissions, and there are usually two types:

  • Front-end load:  Paid when you purchase a fund
  • Back-end load: Paid when you sell a fund

What you’re charged depends on the broker and account you select. You can choose a broker that doesn’t charge any stock trade fees: Robinhood, SoFi Invest, Fidelity and Charles Schwab are good examples. Other platforms may have a flat minimum annual fee, most often under 1%.

While this cost sounds low, it’s based on your investments. For example, 0.25% of $10,000 is $25 a year but for a $1 million balance, the yearly fee would be $2,500 a year. One million dollars is often the goal for many investors building a retirement fund, which means a few thousand dollars getting taken out every year can hurt your bottom line.

Sometimes broker fees are a percentage of a transaction, a flat fee or both. Having a financial advisor might cost you even more, too. Full-service brokers can charge anywhere from 1% to 2% of your assets under management.

Full service broker vs. discount broker

You’ll typically find two types of brokerages: discount and full-service.

A discount brokerage charges lower fees compared to full-service firms, but you’ll have to do more work yourself when it comes to choosing your own investments and researching companies. If you have or want to have investment knowledge and make your own decisions when it comes to managing your account, a discount brokerage might be enough for you. But if you need the extra help choosing the best investments at the right time for you, you may want to look into full-service firms.

A full-service brokerage charges more but you’ll get tailored advice, recommendations and investment opportunities based on your investment goals. Some brokers make a profit based on the securities or assets you invest in along with other various account management fees.

How are brokers regulated?

The SEC regulates brokers, dealers and broker-dealers. Registered broker-dealers must be a member of the Securities Investor Protection Corporation (SIPC), too. When your stockbroker is an SIPC member, it means you can get your cash and securities back during liquidation (up to $500,000). States have their own additional requirements for how broker-dealers register within the state.

Brokers have to complete various exams and certifications to register as a broker-dealer; it’s a pretty rigorous process. They have to file a Form BD, become a member of a self-regulatory organization (the Financial Industry Regulatory Authority or FINRA, for example), be a member of SIPC and follow any state requirements. Any additional people – like partners or employees – must also complete the necessary requirements.

Suitability obligation vs. fiduciary obligation

Financial professionals tend to operate under one of two standards: fiduciary or suitability. A fiduciary means an investment advisor is making trades and decisions regarding your investments that are in your best interest. Investment advisors can’t make a decision that earns them a higher commission but isn’t necessarily what’s best for you.

Suitability is what suits the client but isn’t necessarily a decision made in their best interest. Just because a recommendation is suitable for a client, doesn’t mean your stockbroker is a fiduciary. Suitable is like the minimum amount required; fiduciary is going above and beyond to meet your needs as an investor.

How to find a broker

Finding the best broker depends on your needs as an investor. Here are a few things to look out for:

  • No-fee trades: Many of the best brokers charge no fees or commissions for securities like ETFs and index funds.
  • No account minimum: If you don’t have a lot of money to open an account but want to start investing, find a broker that doesn’t have an account minimum requirement.
  • Research and education: When you’re handling your own investments and trades, you’ll want to find a company that has investing reports, analysis and advice from some of the best investment research firms.
  • Customer service and access to experts: Most of the top brokerages have around-the-clock customer support and the opportunity to talk to financial advisors (usually for an upcharge). Beginners may need the assistance, so strong customer support might be a priority.
  • Easily accessible: If you want to make trades wherever you are, find firms that have a strong user experience on web and mobile app.

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What Is a Trust and Why Should You Set One Up?

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone and is not intended to be a source of investment advice. It may not have not been reviewed, commissioned or otherwise endorsed by any of our network partners or the Investment company.

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A trust is an asset and estate manager that you can use throughout your life and after you die. As a legal entity, it has a trustee, or manager, and appointed beneficiaries, and provides detailed instructions for how you want your belongings handled when you pass away.

Trusts help your loved ones understand what you’d like done with your estate and also gives you control over how your wealth is disbursed. Here’s what you need to know about this estate planning tool to decide if you should set one up.

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How does a trust work?

A trust is a legal entity that serves to manage your assets both while you’re alive and after you die. The assets placed inside the trust are known as the corpus. Trusts can hold a variety of assets, including cash accounts, real estate, investments, heirlooms, life insurance and business interests.

There are three main parties involved in a trust:

  • Grantor: This is the person who makes the trust. If you’re building a trust for yourself, you are the grantor.
  • Trustee: This is the trust manager. Sometimes the grantor and the trustee are the same person.
  • Beneficiaries: These are the people, groups of people, and/or organizations that will inherit the contents of the trust.

If you’re the grantor, you will establish a trust that is a good fit for your needs (more on the types of trusts below). Depending on the type of trust you have, you’ll own and manage the trust for your lifetime (revocable trust), or you’ll no longer own or manage your assets once they’re in a trust (irrevocable trust).

After you decide on a type of trust, you’ll appoint a trustee, choose your beneficiaries and place the assets into the trust. When you die, the trustee gains instant control. This person will handle the distribution of your assets, which can happen fairly quickly if your instructions are clear.

If you have placed age limitations on when beneficiaries can receive specific assets, your trust can live on until they come of age. It can also stay intact to provide financial assistance to loved ones or to protect assets.

Do I need a trust?

If you don’t have a partner, children and assets — like a home or valuables — you might not need a trust. But for many people, estate plans like a trust can be helpful. A trust can help you ensure your assets are managed according to your wishes during your lifetime, if you were to become incapacitated and after you pass away.

To figure out if you should get a trust, think about your needs, your future and what your family would do when you die. The size of your estate as well as your age and marital status should all factor into your decision. The following are common reasons for getting a trust:

  • Clearly direct where and when your assets are distributed: If you have specific plans in mind about where you want your money to go and how you want it distributed to beneficiaries, a trust might be worth the investment. Trusts provide clear-cut directions for beneficiaries to handle your assets and end-of-life wishes.
  • Avoid probate court: Another common reason to create a trust is that it helps you avoid probate, a lengthy legal process that wills must go through to determine the proper distribution to heirs. It’s time-consuming — anywhere from a few months to a few years — and can be costly due to attorney and court fees. Because of this, many people choose trusts over wills to avoid probate.
  • Potentially minimize taxes: Some people also use trusts for tax planning purposes, as they can reduce inheritance or estate taxes.

However, it is important to keep in mind that trusts are generally more costly and complex to set up in comparison to wills. You will also have to deal with ongoing maintenance.

Trust vs. will: What’s the difference?

You can have both a trust and a will. They are both estate planning documents, but they play different roles.

Functionality: A will is a document stating how you want your assets and affairs handled when you die. It’s a legally enforceable document that can be as specific or as general as you want it to be. For instance, if you have minor children, you could detail who retains guardianship if you pass before they are legal adults.

A trust, on the other hand, is not just a document but a legal entity that houses your assets, accounts and belongings while you’re alive and then when you die. You give a third party, the trustee, the permission to manage your assets and when you do pass, your beneficiaries will inherit what you’ve left for them.

Probate: Wills go through probate, the court responsible for settling wills and estate plan to make sure they’re followed to the best of their ability. Probate is public record, which means that anything left in a will will become part of the public record. The potentially lengthy court proceedings can also be costly.

Most trusts don’t go through probate since the grantor has already given control to the trustee. This means your information isn’t made public and you’ll avoid potential costs associated with the often time-consuming process of probate.

Ability to update and change: Another key difference between wills versus trusts is that wills can be updated and changed throughout your lifetime. On the other hand, some trusts don’t allow for changes to be made after assets have been transferred into a trust.

Types of trusts

You can choose different types of trusts depending on your needs. Most trusts fall into one of several categories:

  • Revocable trust: This type of trust lets the grantor maintain ownership throughout their lifetime as well as make changes to the trust as they see fit. With a revocable trust, you can make changes and even terminate it as the grantor or trustee.
  • Irrevocable trust: With an irrevocable trust, the person who opens up or manages the trust does not have power to change documents, details, beneficiaries or any other part of the trust after it’s created. Revocable trusts are typically converted into an irrevocable trust when the grantor dies.
  • Testamentary trust: This type of trust works alongside a will and goes into effect after a person dies. This trust can also be considered revocable since it can be updated while you’re alive.
  • Living trust: A living trust is a trust that takes effect when you’re alive. While many revocable trusts are living trusts, if you create an irrevocable trust when you’re alive, that counts as a living trust as well.
Commonly used types of trusts

Marital or "A" trust

A type of irrevocable trust where your surviving spouse is the beneficiary; designed to help them avoid paying any taxes on those assets.
Credit shelter trustAlso known as a Bypass or "B" trust, it allows beneficiaries to inherit assets without paying estate taxes; usually for couples with a lot of money who want to minimize tax liabilities when a surviving spouse dies.
Charitable trustA trust that lets you leave your assets to charities and organizations of your choice, usually nonprofits.
Blind trustWith a blind trust, the grantor doesn’t know how the holdings (or assets) are doing, leaving it up to the trustees to handle it; usually a trust that elected officials use to avoid conflicts of interest.
Insurance trustA type of irrevocable trust that has a life insurance policy as an asset; helps minimize estate tax liability.
Spendthrift trustA type of irrevocable trust that makes qualified distributions to beneficiaries rather than a transfer of assets; meant to protect beneficiaries from themselves.
Special needs trustA trust that is set up for a special needs child to manage assets and provide instructions for care.
Education trustA type of living trust made specifically for a beneficiary’s education costs; can be multiple beneficiaries with a percentage that goes toward each.

Setting up a trust

1. Choose your type of trust

The first step to setting up a trust is figuring out which type of trust is right for you. The most popular type is a revocable living trust since it gives you control over your assets and lets you manage your account while you’re still alive.

While it’s a good idea to set up a trust as soon as you’re able to, circumstances can change throughout your life that may cause you to update your trust. A revocable trust gives the majority of people the flexibility they like.

2. Iron out the details

After you’ve determined the type of trust you want, you’ll need to get your trust documents in order. Identify which assets you’d like to go into the trust, as well as your beneficiaries and how you’d like for everything to be distributed.

This is also a good time to list out any conditions necessary. For instance, if you have young beneficiaries, you might give them a minimum age to reach before getting their inheritance.

3. Create your trust document

While a lawyer isn’t required for setting up a trust, hiring a professional help might be worth it. You can hire a trust or estate attorney or a financial advisor who specializes in estate planning. This person can help you set up a declaration or deed of trust, or your official trust document.

Once your document is completed, it needs to be notarized. You also may have to file trust documents with your state.

4. Fund and register your trust

After your trust is created, you’ll need to fund it through a financial institution, which can be done online or in person.

At this point in the process, you will also need to register your trust with the IRS for tax purposes, which can be done online or by submitting a form by mail. Your trust will get its own unique taxpayer identification number (TIN).

How are trusts taxed?

Trusts can help minimize the tax implications of inheritance. How trusts are taxed depends on the type of trust and the assets within the trust. Cash, stocks and most real estate assets are not taxed when you inherit them. But if you sell them — like a home, for example — you may have to pay capital gains tax.

Some trusts leave the taxation up to the grantor rather than the beneficiaries. For instance, if you have a simple trust, you’re required to distribute income annually to beneficiaries and this income is taxed. The trust can’t distribute to a charitable organization and doesn’t have a grantor. A complex trust is the opposite of a simple trust: You have a grantor, you don’t make annual payouts to your beneficiaries and you have charitable organizations that are set to receive some of your funds. Grantors who have at least some of the power — like through revocable trusts — are taxed rather than the beneficiaries.

Trusts are required to file Form 1041 every year the trust has at least $600 in income. If you have a grantor trust and report income and expenses on your own tax return, however, the extra Form 1041 isn’t required.

An estate attorney or financial advisor can help you create a trust that best fits your situation. Consider consulting or hiring one before you create a trust.

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What Is Portfolio Management?

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone and is not intended to be a source of investment advice. It may not have not been reviewed, commissioned or otherwise endorsed by any of our network partners or the Investment company.

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Portfolio management is a specific investment approach that includes building and managing your investment portfolio through buying and selling securities and other investments to meet your short-term and long-term goals.

While you can do portfolio management on your own, you can also hire a professional portfolio manager. A professional portfolio manager will handle your investment account on your behalf, whether through active or passive management. We’ll cover what portfolio management entails to help you decide if a portfolio manager is right for you.

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What does a portfolio manager do?

A licensed portfolio manager works on your investment portfolio on your behalf, selecting appropriate investments and overseeing your portfolio to help you achieve your financial goals.

A portfolio manager takes into account your objectives, risk tolerance, time horizon and any preferences you have regarding which securities you would like to invest in. They then measure risk and reward with expert analysis to find the right investments based on your goals and preferences.

Active vs. passive portfolio management

There are two types of portfolio management: active portfolio management and passive portfolio management. Your risk tolerance might determine your portfolio management style.

Active portfolio management: This involves a portfolio manager strategically buying and selling individual stocks and other securities in an effort to beat benchmark performance. The portfolio manager will review a stock’s history, potential earning power and other considerations when deciding whether to buy or sell.

Active portfolio management tends to have a higher risk since you’re looking to beat a benchmark, but this also means you could see potentially higher rewards (or, on the flip side, larger losses). Active portfolio management with a portfolio manager tends to have higher fees compared with passive portfolios because there is more buying and selling involved.

Passive portfolio management: Passive portfolio management is mostly hands-off. Instead of hand-picking your assets, your investments are usually in exchange-traded funds (ETFs), index funds or similar securities. While active management strives to beat benchmark performance, passive portfolio management looks to match it.

There’s much less risk involved in passive management, as you spread your money around to many different assets. That also means your potential return likely won’t be as high compared with active management, but you also won’t face as tumultuous of losses. You can expect lower costs with passive management compared with active management because there is usually less trading and oversight.

What does portfolio management entail?

When it comes to effective portfolio management, there are several key principles to keep in mind. These are generally the backbone of strategies professional portfolio managers employ.

Asset allocation

Asset allocation is the process of dividing your portfolio among many different types of assets or securities. This includes investments like stocks, bonds, mutual funds and others. Your asset allocation depends on the types of assets you’d like to invest in, when you plan to cash out — like retirement — and how risky you are as an investor. Not all types of assets will move up and down at the same time, so having a mix of many different types of assets can help balance your portfolio and protect against outsized losses.

Diversification

Diversification is about ensuring that you have a broad mix of assets in your portfolio — both among and within different asset classes — to reduce your risk. If you experience a drop in one asset, hopefully the rest of your investments won’t experience too much volatility that you’ll experience a major loss.

While it may seem tempting to put all of your money into one potentially lucrative stock or company, if that company fails you will lose all your money. Diversification spreads out your money among many different assets. This minimizes risk and lowers your chances of experiencing a huge loss when markets are down.

Rebalancing

Rebalancing is when you adjust your portfolio back to its original asset allocation mix. As your investments change, some assets will grow more than others. Similarly, some assets will drop more than others. Rebalancing is like realigning; you want to adjust every so often to make sure things are in the right place. You can rebalance every quarter, every year or when your assets change by a certain percentage; most people need to rebalance at least annually.

When you rebalance your portfolio, you’re looking at individual assets as well as your long-term investment goals. If your investment goals have changed over the last year, you’ll want to adjust your assets to match your goals as they currently are. Sell off investments that aren’t working for you, as long as you aren’t selling those assets at a loss. Look into buying new securities that are more in line with your ideal portfolio, but try not to buy when those investments are high. Adjust your contributions as needed.

Tax minimization

When you sell an investment, you may be taxed on those capital gains or dividends. While it’s very difficult to escape taxes, you can minimize the amount you’ll pay if you craft your portfolio correctly, and portfolio managers may keep this in mind when building your portfolio.

ETFs and index funds, for instance, are often managed with tax efficiency in mind. Some portfolio managers may also utilize tax loss harvesting, which uses investment losses to offset gains, helping to reduce your tax bill.

Tax minimization not only helps lower the amount you’ll owe in taxes right now, but in the future as well. Your investments could cost you if you aren’t minimizing your tax risk.

Using portfolio management investing techniques

If you’re handling your portfolio management, you’ll need some solid investing techniques to maximize your return. When it comes to how to build a portfolio, it depends on your goals, risk tolerance and investment timeline, as well as the process of evaluating your potential returns.

One of the most effective ways to manage your portfolio is through modern portfolio theory, a popular investing strategy that upholds the importance of diversification — when you spread your money across many different assets and securities — and the notion that the more risk you take, the more reward (and loss) you could face.

Here are some other portfolio management techniques to keep in mind as you build and manage your portfolio:

  • Set financial goals: These are the reasons you’re investing. This can be everything from getting ready for retirement, taking a vacation, saving for your child’s education, paying for your wedding or any other major financial goal. Once you determine your investment reason, you can set up a strategy to meet those goals.
  • Assess your risk tolerance: Be mindful of the type of investor you are. The more risk you are willing to take on, the potentially higher reward you’ll get (and the possibility for larger losses as well). If you’re a conservative investor, it might take you longer to reach your goals compared with an investor who takes more risk, but you also won’t be as vulnerable to potential losses.
  • Determine your timeline: Based on your goals and your risk tolerance, you’ll decide on a timeline to hit your target. Within your long-term goal, you’ll have short-term goals to hit. For instance, if you’re set to retire in 10 years, check in every year to make sure you’re on target. When you get closer to retirement, you’ll want to lower your risk to avoid major drops if the market takes a hit.
  • Calculate expected returns: To calculate your return, you’ll need to add up the weighted average of the rate of return for each security in your portfolio. Past performance and historic data is used to calculate expected returns, so it’s important to note that nothing is guaranteed, but guessed. You can usually find this data through your brokerage account, which typically details how an asset has performed in the past.

Do I need a portfolio manager?

Whether you need a portfolio manager depends largely on your financial situation and how much time you are willing and able to dedicate to the creation and oversight of your portfolio. For instance, if you have a lot of money to invest or your tax situation is complicated, a portfolio manager could be helpful.

Robo-advisors can be a great portfolio management for many people, as they generally have a low barrier to start investing and charge lower fees than traditional portfolio managers. However, robo-advisors generally offer passive management and a more limited selection of investments. If you are looking for a broader selection, want active management or have a more complicated financial situation, you might want to consider a traditional portfolio manager instead.

As you search for a portfolio manager, there a few things to keep in mind:

  • Account minimum requirement: Some firms have a minimum dollar amount to invest before you can get a portfolio manager. You’ll want to focus your search on firms with investment minimums that you can comfortably meet.
  • Education and expertise: Make sure you find a professional with the right education and expertise to manage your investments. For instance, many professionals might hold a certified investment management analyst (CIMA), certified financial planner (CFP) or chartered financial analyst (CFA) designations, all of which require advanced coursework and a certain level of experience to obtain.
  • Fees: Consider the management fees and how the costs of portfolio management will impact your total returns. Sometimes having a human manage your account as opposed to a robo-advisor might allow for active management and a greater level of customization, but you’ll also likely incur higher costs. You’ll have to weigh how important fees are toward your earnings.

Before selecting a portfolio manager, you’ll want to shop around and compare your options — after all, this is the person who will be managing your money to ideally help you make your financial goals a reality.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.