Monday, June 9, 2014

Alternative Brokerages

When it comes to investing there's more than the normal definition of investing across multiple companies that operate in different sectors of the economy.  There's also diversification among the brokerages that you have capital invested at.  In the case of a brokerage firm becoming insolvent most times your assets will be transferred in a timely manner to another registered brokerage firm.  There's also SIPC insurance that will kick in that acts in much the same way as the FDIC insurance that banks fall under.  You can read more about SIPC and what happens in the event of a brokerage firm failure here.  The transfer of your assets should take place in a timely manner but I'd hate to be relying on access to my dividends once I reach financial independence and having to deal with a brokerage failure.

I've been looking in to what other brokerage firm to invest at and have pretty much narrowed it down to three options.  There's a normal brokerage house, Scottrade, that is great because of their flexible dividend reinvestment program (FRIP) which is really awesome.  Having the ability to choose which companies you reinvest your dividends in would fit in really nicely since I recently turned off the automatic reinvestment of all my dividends.  The other two are relatively new brokerage firms but offer some really interesting perks.  One is called Motif Investing and the other is Loyal3, which I mentioned earlier this year.

Loyal3

Advantages:

No fees to buy or sell companies

Can purchase stocks with your credit card and "earn" credit card rewards

Can purchase stocks with as little as $10

Easy to dollar cost average into several positions

Disadvantages:

Limited number of companies to invest in, although there are some solid dividend growth companies in the group

No real-time trading of the stocks

Very new brokerage so the long-term solvency is unknown

Motif Investing

Advantages:

Create your own ETF/"Motif" containing up to 30 companies with different weightings for each company

Each "Motif" purchase costs $9.95 and it's $5.95 to buy/sell individual securities

Minimum investment of $250

Can sell individual pieces of your motif for $5.95

Can dollar cost average into multiple companies relatively easily

Disadvantages:

With frequent purchases you will have several very small lots of each company

Small lot sizes will lead to high commission costs if you're forced to sell

Very new brokerage so the long-term solvency is unknown

All three brokerages have some advantages and disadvantages.  I really want to diversify to a secondary brokerage over the next few months to start building up a secondary portfolio.  In my opinion Motif and Loyal3 have more advantages than Scottrade but the long-term track record of those two are very much in question.  There's just no telling if these will be viable long-term options whereas I'm fairly confident that Scottrade will continue to be around in 30 years just like the companies I invest in.  The ability to purchase stocks through Loyal3 with my credit card and earn extra rewards is awesome as that can help me earn extra cash back or points/miles for travel.  Being able to invest in my own personal ETF through Motif is great as I can continue to dollar cost average into the companies of my choosing.  And of course Scottrade's FRIP is a nice twist on a dividend reinvestment program although you don't have the option to really dollar cost average into positions due to higher commission costs.  I've created a poll to try and get a reading from you, my readers, to see which one you use or are more interested in.


Click here if the poll doesn't load automatically.

20 comments:

  1. Big fan of Scottrade here. The FRIP has been a huge success for me the exact reasons you just stated. Also, the long term solvency is something I find bothersome in any new brokerage and that is something that would steer me away from the other two options. I also like being able to just walk into the Scottrade branch near my house in Houston if I need help with something that can't be resolved online.

    ReplyDelete
    Replies
    1. NickB,

      Scottrade has been at the top of my list for a secondary brokerage especially after they announced the FRIP. I really like the ability to DCA cheaply/free with Motif/Loyal3, my biggest concern is the long-term sustainability of those brokerages. I might even go with Scottrade as my main secondary brokerage and go with Loyal3 for some small DCA.

      Thanks for stopping by!

      Delete
  2. I am currently a Scottrade customer. I have my regular trading account as well as my IRA there. I am also looking to start antoher account in some other brokerage. I have come across Loyal 3 in some of the blogs and especially like the fact that there are no fees and no minimums. I have not heard about Motif and really sounds interesting that you could buy several companies for $9.95.
    Please post updates on which brokerage you end up choosing.
    Also, which one do you currently use and what are the fees like?

    ReplyDelete
    Replies
    1. DGJourney,

      I've heard great things about Scottrade and I know several other bloggers that use them as their primary brokerage. The FRIP is great and I wish more brokerages would offer something similar. I'll let you know what I decide but I think I might be leaning towards Scottrade as my main secondary with either Loyal3 or Motif as a way to DCA much more cost effectively.

      Thanks for stopping by!

      Delete
  3. Started as a trader, i chose Interactive Broker. I have quit my trading tests and involved as an investor.
    So far I am still using services of Interactive Brokers and I am satisfied.
    Monthly minimum fee is 10 USD. For buy/purchase of any quintity of one symbol is 1 USD commision.

    ReplyDelete
    Replies
    1. Jaroslav,

      I've heard of IB before but never looked in to them. I just stuck with the brokerage that my employer houses our 401k and ESPP with for convenience really. Those fees seem pretty good as long as you can make at least one purchase a month and 2+ really brings down those costs. I'll have to look more into IB.

      Thanks for stopping by!

      Delete
  4. I really Like the Motif Idea. But it needs some developing. But it is a great idea. will be interesting to see their evolution and what mainstream sites will offer motif like services.

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    Replies
    1. A-G,

      Both Motif and Loyal3 are great ideas. I think Motif has a better long-term viability than Loyal3 at least in their current forms. I'd love to see more brokerages offer services like Motif but I don't expect that to become mainstream, at least for a few years at the earliest.

      Thanks for stopping by!

      Delete
  5. I believe with Motif your dividends collect into a cash account and then are redistributed as you see fit much like a FRIP plan. I have been looking at Motif as well but the unknown of their solvency holds me back.

    ReplyDelete
    Replies
    1. Anon,

      I just recently learned about Motif and their concept is really awesome but I share the same concern about the long-term solvency.

      Thanks for stopping by!

      Delete
  6. I really like the no fees with loyal 3, but I am currently using sharebuilder for $6.95 per trade. Is loyal 3 a safe brokerage? What would happen to my stocks if they went out of business?

    ReplyDelete
    Replies
    1. Dividend Mongrel,

      Sharebuilder is another one I was looking at but I think I'm probably going to go with one of these three and most likely it'll be Scottrade. Loyal3 is a member of SIPC and in the event of them going out of business it essentially works like this. If it's just the broker closing up shop for any kind of operational reason then your assets will be transferred over in kind to another brokerage firm. If it's a fraud situation then the SIPC will kick in and covers only up to a certain level. At least that's the way I understand that SIPC works.

      Thanks for stopping by!

      Delete
  7. My issue with Loyal 3 is that their business model (zero commission) has been tried before and failed. Add in the credit card transaction fees they are paying and I see them as another Zecco, get a bunch of people as fast as you can with a losing structure and then change to commissions and weird fees and trading minimums and get rich off the inertia of people who don't leave.

    I use Scottrade. $7 a trade, no fees, no hidden costs. I have 3 accounts there and got friends investing there with another 7 accounts. Easy and simple is the way to go.

    ReplyDelete
    Replies
    1. Jeffrey,

      It definitely seems odd and too good to be true. What was the reason for Zecco's failure? I know the reason that Loyal3 is fee free is due to their participation in IPOs but it still doesn't seem like a sustainable business model. Really great concept though.

      Thanks for stopping by!

      Delete
  8. I'm currently evaluating my brokerage options. My current brokerage charges high fees when buying foreign stocks so I definitely need to do something about. I'll probably open an account in a German brokerage, since there aren't any competitively priced Finnish options. Commission fees may seem like an insignificant thing, but every penny not spent is a penny saved!

    Regards,
    TDW

    ReplyDelete
    Replies
    1. Dividend Way,

      So does my current one but luckily most of the foreign companies I'd like to buy has ADR's so it's just normal commission costs to purchase them.

      Thanks for stopping by!

      Delete
  9. I have used Scottrade a lot for well over 10 years and really like their relatively new FRIP program. It is one of the easiest and most flexible ways to reinvest dividends. I wish regular brokerages would offer reinvestment plans. I guess that's why companies like Sharebuilder and Motif, Loyal3, etc. came about... the need to create a dividend reinvestment plan.

    ReplyDelete
    Replies
    1. DivHut,

      I almost went with Scottrade when I first opened by brokerage account but went with the same as my 401k and ESPP from my employer for convenience. I get free dividend reinvestment with mine but there's no flexibly options like with Scottrade's FRIP or the flexibly purchase options like Loyal3/Motif.

      Thanks for stopping by!

      Delete
  10. Hi JC. I currently use Scottrade and have been satisfied with them as a brokerage so far over the past few years.

    It's funny you write this article at this time because this is something I was thinking about just yesterday. I was considering spreading some money around into another broker just for safety as well. One I was looking at is TradeKing. They have $4.95 commissions and looked pretty good to me.

    Motif sounds interesting. Especially because was thinking of the idea of creating a portfolio of 15-20 core dividend growth companies and then just dollar cost averaging each month or quarter. It sounds like Motif could be used for this at a reasonable cost. I will have to look into them. But my concern, like yours is how secure the company is. When it comes to banks and brokerages, I usually like to stay with the proven companies so I don't have to worry to much about my money!

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    Replies
    1. Dan Mac,

      I'll have to look into TradeKing because $4.95 commissions is pretty cheap.

      Motif does sound good and what drew me to it is the same reason that you're interested in it. I wanted to do the exact same thing and come up with my own ETF of core DG companies to DCA into every single month. It wouldn't give me the best valuations all the time but it would allow me to consistently add to great companies. And we share the exact same concern. I'm not sure how they'll fare long-term but they do charge commissions so it could be more viable than Loyal3 long-term without some unexpected changes in the future. I'll be checking in with both Motif and Loyal3 from time to time to see if anything's changed but I think I'm leaning towards Scottrade mainly because of the FRIP. Although TradeKing does sound good so I'll have to check them out too.

      Thanks for stopping by!

      Delete