Now you’ve come to the point whereby you want to open up an investment account, we’ll run through an overview of the various different types of investment accounts you can open:

Self-Directed Brokerage Account

A self-directed brokerage account is one in which you have complete control over how you invest your money.

You have access to a wide variety of assets to purchase, as opposed to a narrow selection of funds/ETFs by a financial advisor.

If you are looking to start day trading, this would be the right account to open, because you can open and close a position any time you choose. Using a self-directed brokerage account, you could even experiment in options, short selling, futures and derivatives. In contrast to other types of investment accounts, a self-directed brokerage account is limited only by what the brokerage makes available to you.

Other important things to consider when choosing where to open a self-directed brokerage account are account fees and commissions. Many investment platforms charge high fees in order to utilise their platform, so be sure to check out our tools page in order to get a good look at the different options you have.

Even within a self-directed broker account, you can access government incentives, like a 401K plan if you are in the USA, or a ‘Cash and shares ISA’ if you are in the UK. Using the example of the cash and shares ISA from the UK, any gain you make is completely tax free.

So, before you make a decision on which brokerage to choose – you should always check to see if there are any government backed schemes for your particular geographical region that is worth utilising.

Robo-Advisor Account

A robo-advisor account is a platform which is fully automated. A typical robo-advisor collects information from clients about their financial situation and future goals through an online survey and then uses the data to offer advice and automatically invest client assets.

Robo-advisors let a computer manage your investments for you based on your pre-defined preferences, and due to the limit on human interaction, robo-advisors are in a position to charge a low, flat fee, which is around 0.25% a year on your total investments. Online adivsor-directed brokerages tend to charge more or higher fees. 

Robo-advisors really are great for hands-off investing, or for investors who don’t want to actively choose and trade assets. Robo-advisors tend to invest in index funds and ETF’s to keep costs low, whereas a brokerage would let you invest in many different types of securities.

Advisor-Directed Brokerage Account

A managed account gives your investment advisor complete control over your money. Your advisor decides which securities to buy and sell or whether to hold your money in cash. Once they’ve learned about your investment goals, they will run the investment portfolio for you.

Hiring someone does not mean they will achieve higher returns than you would on your own. You are simply trusting a financial advisor to follow a consistent investment process, and build an appropriate portfolio for you. The main benefit of hiring a financial advisor is the fact you don’t have to try to become an expert with investments overnight. You can just employ someone to take the hard decisions for you.

Although building a portfolio may be rewarding to some investors, others who are less experienced with the markets may prefer to take a more passive approach. Whilst investors still have a say in their investing goals and can set their own risk tolerance levels when using a financial advisor, they may work with the advisor on a strategy toward pursuing those goals, but the actual execution of the investment strategy is the responsibility of the hired advisor.

Hiring an advisor, or a ‘money manager’ typically has higher fees than a robo-advisor or a self-directed investment account, but that’s due to the fact you are paying for the service of an experienced investor and mitigating your risk.

Retirement Account

A retirement account is usually a defined contribution plan where you can contribute a set amount of money at regular intervals. These funds are held until retirement, where you can withdraw money from the account as and when you need it.

There are many different types of retirement plans available in different countries, and arguably one of the best known is the 401(k) plan. Regardless of whether you live in the USA though, you should always do you research on what retirement account plans are available to you.

One of the key benefits to a retirement accounts is that the contributions to it are tax-deferred. This means that you can contribute to your retirement account pre-tax in favour of paying the tax later when you withdraw it. This has two benefits. First, it reduces your taxable income in the moment. Second, since you’ll likely have a lower income in retirement, you may be in a lower tax bracket.

You’re responsible for setting up your plan, deciding how much of your pay-check to deposit and choosing investments. Some employers offer to match contributions up to a certain percentage of your salary. If this is your case, it’s in your best interest to contribute at least up to that percentage, since not doing so would effectively be turning down free money.

Retirement accounts are usually a good idea, so please do check the retirement plans that are available residents of the country you reside in.