The Custodian

Where you choose to hold your securities (types of investments) is a personal choice you make when investing money outside your retirement plan at work (401k, 457, 403b, TSP, etc...). Why choose one custodian (brokerage house) to hold your investments over another? That is the topic of this month's newsletter. It is not so clear cut as one might think. Let's explore the issue and the nuances.

Let's start with why these custodians exist. They are there to provide a liquid and transparent market place for buyings and sellers of securities, which includes stocks, bonds, mutual funds, ETFs, etc. This is important for investors as we need a place to trade that is liquid, convenient and simple to use. The big question is, which one (or more than one) do you choose to hold your investments?

The truth is, many people end up choosing a custodian without any real thought on why. Some folks end up at a brokerage because their advisor has selected that brokerage for reasons suitable for the advisor. This is not necessarily a bad thing, but it is important to understand why. If you have an advisor, ask him or her why they have chosen the custodian that holds your investments.

Now, let's get down to the details that many of you want to understand. What custodian do you select if you are managing your own investments? Here, I am going to focus on the big three: Vanguard, Fidelity, and Schwab. Could you select another custodian that would serve your needs just fine? Sure, but these big three would be wise options for the vast majority of investors in most cases.

Those big three provide basically everything you will need to invest your hard earned money. Is one better than another? That is subjective, but here are my thoughts. Select the one that works best for you. Sometimes it is just a comfort level in how wonky or user friendly the website might be. A user friendly site and good customer service goes a long way. The way they are structured makes a difference, too.

Personally, I have selected Vanguard. Why? It has to do with their not for profit model. Some of it has to do with John Bogle who created the first index fund, which served investors like you and me instead of the financial services industry. Some of it has to do with the ease of using the website. A small part has to do with customer service, which has gotten worse over time in my opinion. No place is perfect.

Would I change to Fidelity, Schwab or someone else? Maybe, but it would take a negative turn from Vanguard for that to happen. Negative? Customer service continued to get worse. Website maneuverability became more difficult. Too much self promotion of their advisory services. Their core values change from putting the investor first, to putting Vanguard first. Will those things happen? Who knows.

Here is something to think about when making your selection. How does the company do business. Schwab is a publicly owned company and Fidelity is a private company. Sometimes those interests can interfere with your interests. Sometimes they provide so much value, it is worth the change from a company like Vanguard. Here is a big point to consider before making a change.

What is that custodian promoting more than anything else? Ease of trading? Passive investing? Advisory services? Creative investing approaches? Low cost investing? Alternative funds? Active management? Education? That is a short list, but an important one. It is wise to gather the right knowledge from the right people before selecting a custodian. Why? Thousands of dollars are at stake!

Your average custodian is full of people who are very bright and spend their hours trying to bring in more revenue. This means they create marketing campaigns to convince the average investor to spend more money on their many services. Here is the big question. Are they a marketing firm or an investment firm? This is not complicated. Stay away from marketing firms and their expensive products.

Here is some advise. Select a firm based on ease of use. Invest passively in only index funds or ETFs with or without an advisor. If you select an advisor, pay very little for investment advise (the real value will be financial planning). If you don't understand something, don't do it. Educate yourself from the right people before selecting ANY investment. Be skeptical of those who want to "help" you.

Let's wrap it up. Ultimately, it comes down to YOU. While there is no perfect answer for everyone, there is a simple way to do it. You should select the right custodian based on what serves you best. Start with the big three and then venture outward from there over time if you wish. If things change over time, be open to new things. If you want to use more than one custodian, fine. If not, fine. YOU make the call.

Pick the Right Custodian for YOU!!!

Stuff the lawyer wants me to say: Investing outside a bank or a credit union is not FDIC insured. You may lose the value in the investments you select. All information provided here is for informational purposes only. It is not an offer to buy or sell any of the securities, insurance products, or other products named. Translated: I am not selling anything! Educate yourself, research the information that you learned and finally make the right decisions that will benefit you and your family going forward.

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