When people start investing outside their 401k or 403b plan for the first time, their very first question is often "Which broker?" The answer should be "You don’t need one."
Vanguard is a great choice for beginning investors (and seasoned investors!), but Vanguard is not a broker. It’s a mutual fund company. Vanguard has a brokerage subsidiary, but it is primarily a mutual fund company.
What’s the difference between a mutual fund company and a brokerage firm then?
People sometimes use "broker" when they refer to either a company or a person, depending on the context. I use "brokerage firm" when I refer to the company, and "broker" when I refer to an individual person who works at a brokerage firm. The official term for the company is broker-dealer. The official term for the broker-dealer’s employee who takes customer’s orders is registered representative, or "registered rep" in short.
When you open an account with a brokerage firm, you can buy stocks, bonds, mutual funds, and ETFs. The brokerage firm is your intermediary. It holds those investment on your behalf. When you open an account with a mutual fund company, you can only buy mutual funds, and only mutual funds from that same company. You are a shareholder of the mutual funds you buy.
Every mutual fund is a separate legal entity, just like GE and GM are separate companies. Although mutual funds in the same "family" share some of the same vendors (investment advisor, distributor, and transfer agent), the funds are officially independent of each other.
When you buy mutual funds directly from the mutual fund company, you actually have an account with each and every fund you buy. This is different from a brokerage account, where you hold all the assets in one account. That’s why account statements from a mutual fund company always list the activities in each fund separately whereas statements from a brokerage firm interlace activities from different assets by date.
It becomes confusing when some mutual fund companies have a brokerage subsidiary while some brokerage firms have their own mutual funds. Still, companies are either primarily a mutual fund company or primarily a brokerage firm. Fidelity comes close to being equally strong in both. I list some of the popular companies and their primary roles here:
|Fidelity||Brokerage firm. Has in-house mutual funds.|
|Charles Schwab||Brokerage firm. Has in-house mutual funds.|
|TD Ameritrade||Brokerage firm|
|Vanguard||Mutual fund company. Has brokerage subsidiary.|
|T. Rowe Price||Mutual fund company. Has brokerage subsidiary.|
|American Funds||Mutual fund company|
|TIAA-CREF||Insurance company. Has mutual funds and brokerage subsidiary.|
When a mutual fund company has a brokerage subsidiary, the accounts are distinct. You need a separate brokerage account for stocks, bonds, ETFs, and mutual funds from other fund families. When a brokerage firm has its own funds, the in-house funds are usually held in the same brokerage account together with your other assets.
Although the first question is often "Which broker?" in most cases people who just start investing don’t need a brokerage account. A mutual fund company like Vanguard will serve them well.