Pros and Cons of Brokerage Checking Accounts

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Published April 18, 2012

| Bankrate.com

Brokerage firms want to be your banker, too.

Brokerages are offering free checking accounts to woo their brokerage customers. And they're also throwing in tempting freebies, such as online bill pay, mobile banking apps and ATM withdrawal reimbursements, to compete with banks.

How can they do this? Many brokerage firms also own banks. And they can offer insurance up to $250,000 per account through the Federal Deposit Insurance Corp. just like banks, along with checking.

In recent years, some brokerages began offering free online checking to some customers, with some cutting service fees, offering free electronic transfers and linking accounts to prevent overdrafts.

There's another bonus, too. Lower overhead costs help brokers edge out traditional banks, says Wayne Cutler, who runs the wealth management practice at consulting firm Novantas LLC. The result is that more innovations, such as mobile banking deposits, can be offered.

"Brokerage firms are looking for new sources of revenue, and handling bill pay or direct deposit creates a more sticky relationship," he says.

Meanwhile, free checking at banks is dead, Cutler says. That's why some accounts pitched by brokers may look sweeter as they beef up their offerings. But make no mistake, brokerage firms don't want to be your day-to-day bank. So there may be more glitches to navigate such as clearing delays or lack of checking flexibility.

Still, having your checking under the same roof as your assets is a handy convenience, says Greg McBride, CFA, senior financial analyst at Bankrate.com. The sweep accounts let you quickly invest your money rather than transferring it, and brokerage account balance requirements and fee structures are very competitive with banks.

"These days, you're seeing fewer one-trick ponies and more financial service firms meeting all customer needs," McBride says.

But, there are caveats. If having a small bankroll means your brokerage checking account isn't free, look elsewhere. Casting a wider net to cover credit union, online bank and community bank accounts makes more sense, he says.

Cutler says despite allowing free checking, brokers don't offer many banking services. They may lack safety deposit boxes, bank checks, free notary services or foreign currency exchange.

Here are four key questions to ask when choosing a brokerage checking account.

How do you access your money? Free ATM access should be at the top of any consumer's list of must-haves, McBride says. For example, one firm's high-yield checking has unlimited ATM fee reimbursements.

Are there extra fees? Brokerage firm fees run the gamut. Pricing, minimum balances and overdraft fees are the usual fee culprits. Wire transfer fees and minimum balance requirements are other gotchas.

"Make sure you understand the fee schedule," says Eric Tyson, author of "Investing for Dummies." "You'll want unlimited check writing privileges."

For example, consumers can get minimum balance fees on some accounts, if they keep a specified minimum balance.

"Read all the fine print, and find an account that matches the type of investor that you are," Tyson says.

Is customer service helpful? Simply put, brokerage firms aren't day-to-day banks. So you'll especially need to vet customer service. Sometimes customer service can be horrendous, Tyson says.

"Try calling the toll-free number several times during the day and week," Tyson says. "How long does it take to get a rep on the phone? Can they answer all of your questions?"

Also, look for ease of site navigation. And can you look at check images or pay your bills online? Is there 24/7 service?

How is interest paid? Some free brokerage checking accounts may have tiered interest rates, Tyson says. Higher rates may be reserved for investors in high-yield funds with higher balance requirements.

On the plus side, brokerage firms also may offer tax-free money market funds where you can park money. These funds invest in short-term municipal bonds.

"Banks don't have these accounts," Tyson says.

Expect brokers to become increasingly bank-savvy. "It's (in the) early days for brokerage accounts," Cutler says. "And they'll become more aggressive."

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