This post isn’t about promoting a brokerage house - it’s about choosing the right place to put your money, for efficiency and convenience. Picking the right place to put your money can save you lots of headaches and hours and hours of time through the course of your investing life.  Here’s my thoughts on the process.  Please submit a comment below if you really like (or don’t like) your broker, and tell us why.

Must haves:

1. Excellent customer service
2. Easy-to-use website and online trading ability
3. Ability to link accounts to your checking, to transfer money
4. Auto-investing features, with no fees

There are tons of competing places to hold your investments, the biggest include Vanguard, Fidelity, Charles Schwab, TDAmeritrade and E*Trade.  You can read reviews of these here and here.  Most large brokers out there today have all these features.  In addition, your specific situation might help you decide.  In my case, we already had two 401(k)s and an employee stock purchase plan at Fidelity, and since the companies providing those plans don’t provide a choice, Fidelity was really a no brainer for my brokerage account.

But there’s one more reason why I really like Fidelity.  They have a feature called “Full-view” - just put in your account login details of all non-Fidelity accounts (even your work 401k, your mortgage), and all of the holdings are sucked in to give you a full picture asset allocation.  This saves tons of time when re-balancing your allocation.  It’s sort of like Mint, which I’ve recommended before, but covers ALL types of accounts.

Other criteria that you might consider:

• Trading commissions - even though I don’t recommend trading individual stocks, this can matter for some people.  Compare fees, and also check if your employer has a discount commissions agreement with any brokerage firms.
• Employer requirements - some companies (mostly banks and other finance institutions) require all employees to use one of a specific set of brokers; don’t forget to check this!
• Statements - all statements are not created equal.  If you can, get a sample statement, and see if it makes sense to you.  There is nothing worse than not being able to easily understand what investments you hold.  Also check if statement-linking is available - it’s nice to get one statement from all of your accounts at a brokerage.

Do you really like your brokerage account?  Tell us about it in the comments.

[Update: One reader pointed out that Fidelity has been known in the past to invest in companies which support the Sudanese government.  Two points there:

1. This post is about picking the brokerage that is best for you - do your own research, and decide for yourself.  As I said in the first line, I'm not plugging for Fidelity here
2. That said, I support socially responsible investing in general, and therefore as a Fidelity user  researched this, since I hadn't heard about it.  Turns out that several of Fidelity's funds had holdings in PetroChina and Sinopec, which operate in the Sudan to pump oil, which in turn generates revenue for the Sudanese government.  Funds known for investing in these companies include the Contrafund and Diversified International.  According to 30-Sept-08 holdings reports, neither of these funds hold these companies.  If socially reponsible investing means something to you, do your homework on your investments.  Look for sites like this, which have screening tools to check your funds.  Since I choose the investments in my account, and can understand their holdings in detail, I'm not that worried about using Fidelity as my investing vehicle, given all it's other positives.

]

If you’re invested in the stock market, chances are you don’t have positive returns for the year. If you want to improve your returns, keep in mind that the investment return equation is pretty much the same as the net income equation: you can directly improve your returns by lowering your taxes.

Total Investment Returns = (Investments Gains or Losses) - Fees - Taxes

If you’ve never thought about the “tax efficiency” of your investments, now is the time, especially since the chances of your taxes increasing in the coming years are extremely high.  The principles are very simple, so you can keep them in the back of your mind whenever you have investing decisions to make, and save your self a bundle over the course of your life.

What is “tax efficiency”

Investment vehicles (stocks, bonds, munis, mutual funds) and account types (IRAs, 401ks, brokerage accounts) are all taxed differently, and at different times.  Some investments have low or no taxes, some are taxed at your highest tax rate.  Some account types allow you to defer taxes for years until you take the money out.  This means it’s possible to arrange different investments in different accounts in such a way to minimize taxes, legally.  This is called “tax efficiency”.  Keep in mind that I’m not saying you should make investment decisions entirely based on taxes - that is definitely not the case.  But considering the investments you already have, you should arrange them in the most tax efficient manner.

Here’s the rule: keep low-tax investments in current-tax (or after-tax) accounts, and high-tax investments in deferred-tax accounts.

Why?  Deferred tax accounts delay taxation for years and years - during this time, the high-taxes won’t drag on your returns.  And, when you withdraw money, they are taxed at your highest tax bracket anyway.  If you hold a low or no-tax investment in a deferred tax account, you’ll force yourself to pay the highest tax rate on it anyway!

Some definitions:

If you don’t know the difference, after-tax accounts don’t get a deduction when putting in money, and deferred-tax accounts do get a deduction (usually via “pre-tax contributions”).

Deferred-tax accounts

• Traditional IRA
• 401(k)
• 403(b)

Current-tax (or after-tax) accounts

• ROTH IRA
• After-tax Brokerage account
• Checking accounts
• Saving accounts (assuming non-IRA)
• Bank Certificates of Deposit (assuming non-IRA)

Low-tax investments

• stocks held > 1 year
• stock index funds held > 1 year
• Exchange traded funds (ETFs)
• municipal bond funds (can be completely tax free)

High-tax investments

• open-end mutual funds
• closed-end mutual funds
• bonds and bond funds (anything that pays “income”)
• Certificates of Deposit (CDs)

Some examples:

• Stocks you hold for > 1 year should be in after-tax accounts - they have special long-term capital gains treatment, currently only 15% tax rate
• Bond funds should be in deferred-tax accounts - the income from bonds is taxed at your highest marginal tax rate (currently up to 35%)
• Tax-free muni bond funds should be in after-tax accounts (don’t you dare put these in your retirement account!  they have lower returns because they are tax free - you will completely wipe out the returns if you put them in your IRA!)
• Stocks you hold for < 1 year should be in a deferred-tax account (this includes your “play” a.k.a. gambling stock day-trading account - which you shouldn’t have anyway, but if you do, hopefully it’s a small % of your total assets)

This weekend, pull out your statements and take a look - how efficient is your portfolio?