​Can Investors Blindly Trust Online Brokers?

Desireé Duffy  |

When was the last time you wrote a physical letter? Or read a paperback cookbook instead of watching a YouTube video? Do you write your exercise journal by hand, or do you prefer to eyeball your Fitbit’s data?

The line between our offline and virtual lifeis becoming increasingly blurred. Think about how you started your day today. It probably began with a quick (or not so quick) glance at your smartphone.

We’re peering into the digital abyss before our feet even hit the floor in the morning. So, it’s only natural that families and professional investors are leaning towards digital investment platforms. The power to execute trades from the palm of your hand is hard to resist.

Investing apps are great, but the real growth is in online brokerages.

You may be surprised to learn that less than 20% of Americans, in every major age group, have an investing app installed on their smartphone. The app store is not ground-zero for the shift in investor activity.

Instead, the most significant areas where we are seeing growth in digital investing is through the engagement of online brokers. This trend goes beyond having an app installed on a smartphone. Following the financial crisis of 2008, there has been a steady evolution in the brokerage world.

Online brokers promise investors lower fees, real-time access to information and entry to a wider variety of markets than traditional investors. But there are important steps investors need to take in order to protect themselves from investment fraud.

In my research, there are a couple of core data points that investors should look out for when considering an online broker:

Is the online broker registered through appropriate government agencies?

Depending on where you call home, and where the online broker is physically operating, there are a variety of government agencies that require formal registration before a broker can execute trades on their client’s behalf.

This list of regulatory agencies is a great place to start vetting any online broker you may be considering. Many online brokers attempt to operate without formal registration - this reduces their regulatory burden and allows them to minimize costs.

But, be warned, the regulators are in place to protect investors. Brokerage agencies operating on the peripheries of their jurisdiction are placing investor money at higher risk.

What is the actual rate you’ll be charged?

In a digital market driven by pay-per-click advertising and 5 second commercials on YouTube, online brokers feel the need to get their USPs across very, very quickly. The average attention span is measured in milliseconds.

You shouldn’t trust your family’s financial future to a flashy ad. Investors need to dig deeper and ask the questions that matter. This includes finding out what the real, long-term fees are for parking your assets with an online broker.

The average teaser rate lasts 6-12 months. This is the amazing percentage that caught your eye in the ad. But, eventually, the real rates and fees will be applied to the management of your account. These fees can be dangerous.

Jack Bogle, the Founder of Vanguard, explains the net worth destroying power that management fees can have on your family's investments in this interview.

Should you use online brokers?

Online brokerages offer a convenient and cost-effective alternative to the traditional setup – that is, if you’ve found the right broker. As with any investment, it is important to read the fine print before parking your assets. Checking for government registrations and asking for long-term fees go a long way in weeding out the scam artists and reckless brokers.

In the end, smart investors are certainly intrigued by the potentially lower cost of choosing an online broker to manage their asset and execute their trades – but due diligence is a must.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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