What Is a Brokerage Checking Account and Do You Need One?
Just like regular checking accounts, brokerage checking accounts make it easy to manage your money. Moreover, they are often free, letting you avoid many of the fees banks charge for regular deposits.
In this post, we explore what a brokerage checking account is, the pros and cons, and how to open one.
What Is a Brokerage Checking Account?
Brokerage and investment checking accounts are different. Investment accounts are a place for you to keep cash before you invest in bonds, stocks, and other securities. In contrast, a brokerage checking account is a facility that provides all the features of a regular checking account at a lower cost. For instance, you can use a brokerage account with checking to:
- Transfer funds to your investment account
- Withdraw cash from ATMs
- Pay household bills
- Purchase items using a linked debit card
- Deposit checks
While these accounts provide conventional banking services, many brokerages provide them as a convenience to their customers. They may be so good that you can use them to replace your regular checking account.
Pros and Cons of Brokerage Checking Accounts
While they clearly offer many advantages, as you might expect, no financial product is perfect. Therefore, we are going to cover the brokerage account pros and cons.
The benefits of a brokerage account include:
- The ability to quickly move money for investing in securities: You will not have to provide any third-party security information, as you would when making a regular bank transfer.
- Access to an extensive network of ATMs without fees: The brokerage will usually reimburse you even if you do wind up paying fees.
- Improved fee structure: You may not have to pay any fees for overdraft facilities (as long as you have money in your investment account).
- Better online research tools
- No minimum deposit: You may be able to open a brokerage checking account with no money. Regular checking accounts typically require $100 or more to get started.
- No minimum balance is required: A brokerage bank account can remain empty indefinitely without being closed.
- Interest payments: You may receive a small amount of interest on balances you keep in your brokerage checking account.
- FDIC protection: Regular checking accounts come with FDIC protection for up to $250,000. However, brokerage accounts may offer protection for up to $1.25 million. Banks with brokerage services can usually fulfill this upper limit, but independent brokerages may not.
Brokerage checking account disadvantages include:
- Low yield. While your brokerage may pay you interest, the yield may be low compared to other forms of savings accounts.
- Lack of availability. While brokerage reps may be available during regular office hours, they may not be able to provide checking account support out of hours. This differs from most banks that offer support 24/7.
- No lending products. The critical difference between a bank vs. a brokerage is that a bank is willing to lend you money, while a brokerage isn’t. Therefore, brokerages don’t provide additional services, such as mortgages and business loans, which may be available via your bank.
- No cash-handling employees. Most brokerages don’t operate brick-and-mortar offices you can visit to discuss your needs with staff, as you could with most banks.
- Finance advice charges. You may have to pay a fee for planning services, whereas financial advice at regular banks is usually free.
How To Open a Brokerage Checking Account
While there are many types of brokerage accounts available, the process for choosing one is fairly consistent. As with all financial products, you’ll need to perform some due diligence beforehand to keep yourself safe and check what you are buying.
Check That Your Money Is Insured
Banks with brokerage accounts always come with FDIC insurance in the event that the bank goes under. However, independent brokerages may not. Therefore, checking the bank and brokerage sides of the checking account is critical. Both need to carry FDIC insurance to protect you in the event of a loss, particularly if you plan on keeping large deposits.
The Securities Investor Protection Corporation (SIPC) insures brokerage accounts. Check that your broker offers this type of coverage, because it’s only available to SIPC members.
Check Commission Fees
Most brokerages offer free checking account services. However, you will still want to ensure they don’t have other ways of extracting money from you. Some may insert sneaky charges to drive revenue.
Be wary of special offers and promotions, too. Brokers often time-limit these, phasing any advantages out after the first few months.
Check the Small Print
We’ve listed the pros and cons of most brokerage checking accounts above. However, individual products may vary. Therefore, always check the fine print.
For example, a standard account might be free, but if you want a brokerage account with a debit card, you may have to pay extra. Likewise, most brokerages won’t charge you overdraft fees, but there are exceptions to this rule.
Minimum account balances could become an issue with some brokerages. Online brokers, for example, typically have no minimum for people looking to open online checking accounts, while some types of brokerage accounts require you to invest thousands of dollars upfront.
Find a Reliable Point of Contact
Brokerage firms have head offices, but they look nothing like conventional banks. You can’t just walk in, have an advisor greet you, and start using financial services. Instead, you would be hard-pressed to find someone who would assist you with your account needs.
Therefore, you’ll need to check that the brokerage offers some sort of customer service – someone you can call, like a branch manager or account rep. Most offer banking service hotlines you can call.
Are Brokerage Checking Accounts a Good Idea for You?
While brokerage checking accounts offer a host of benefits, they still might not be suitable for you. Banking and investing from the same account can tempt you to merge the two sets of financial activities in unhealthy ways.
For instance, you might have several thousand dollars in an account for emergencies. If it’s a regular savings or checking account, the money just sits there, waiting for you to use it. However, if it’s a checking account with a brokerage, it might be incredibly tempting to use that money for investing, instead.
To make things more difficult, brokerages will often display your balance right next to your portfolio funds. Hence, if you see a stock you love selling at a bargain price, you’re only a couple of clicks away from adding it to your portfolio, depleting your cash funds.
In general, allowing money to pile up in checking accounts is not a good idea. Inflation erodes its value over time. You want enough to cover emergency needs, and that’s all.
If you aren’t sure whether you need a brokerage account, speak to a financial consultant. They can review your financial history, and show you how an account can help you build wealth.
If you want an emergency fund of easily-accessible cash, choose a separate savings account. This way, you can protect yourself against inflation while also being able to get your money straight away, when you need it (instead of risking selling stock at a loss).
Brokerage checking accounts appear to offer everything you need. You get low or zero ATM and overdraft fees, reasonable interest rates on deposits, and a debit card for easy payments. However, they aren’t perfect.
For instance, most brokerages do not have physical branches. Hence, you can struggle to find someone to talk to if something goes wrong with your account. Furthermore, even if you find a physical location, going there probably won’t do you any good.
The good news is that brokerage checking accounts don’t charge monthly fees. Therefore, you can set one up with no risk. If you don’t like it, you can always go back to a regular checking account experience.
Do you need a bank account to buy stocks?
To buy stocks, you’ll need an account with any facility that lets you transfer funds. Many brokers accept PayPal or other e-wallet payments, so strictly speaking, you don’t need a conventional bank account to purchase equities. However, having a traditional account helps when transferring funds (say, from the money you earn through your job).
Is a brokerage account a savings account?
A brokerage account is not the same as a savings account. Brokerage accounts do not prioritize high interest rates, whereas savings accounts do. Likewise, savings accounts may restrict when you can withdraw money, while brokerage accounts do not.
Are brokerage accounts checking accounts?
Brokerage checking accounts offer the same functions as conventional bank checking accounts. However, brokerages don’t necessarily provide checking account facilities.
Can you invest in stocks with a checking account?
If you hold funds in a regular checking account, you will need to transfer funds to a trading account first. However, if you have a brokerage checking account, you can use that instead. Funds will be available for investment immediately and don’t require third-party verification.
Albert Einstein is said to have identified compound interest as mankind’s greatest invention. That story’s probably apocryphal, but it conveys a deep truth about the power of fiscal policy to change the world along with our daily lives. Civilization became possible only when Sumerians of the Bronze Age invented money. Today, economic issues influence every aspect of daily life. My job at Fortunly is an opportunity to analyze government policies and banking practices, sharing the results of my research in articles that can help you make better, smarter decisions for yourself and your family.
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