Choosing A Broker For Custodial Accounts: My Search For A Good Deal

Finance
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I am in the research stage of setting up a custodial investment account for a child.

After doing a ton of research on which brokers to choose (including the brokers I personally use), I found some answers that might help the community if they are in a similar situation.

I want to buy simple, low-cost ETFs for the long term and will go with the invest-and-forget it mindset. I plan on making one purchase a month until the child grows up. I do not need fast executions, options, margins or Bloomberg Terminal-type research access.

Broker criteria:

  • company must offer custodial accounts
  • company must offer free or low cost commissions per trade
  • company must allow dividend reinvestments
  • company must not charge monthly fees
  • company must not have account minimums
  • company must allow for fractional share purchase

I checked the traditional companies such as Etrade, Fidelity, Merrill, IB, Vanguard, etc… as well as the “new” disruptive companies such as Robinhood and Stockpile.

First, I looked at the traditional companies.

We all have our favorite brokers and we could create custodial accounts using our existing relationships. The commissions range from $0 to $9+. Getting these commission rates requires a relationship, which may mean maintaining a certain minimum account value. Some of these brokers don’t allow fractional share purchases.

I’d do a comparison chart here but it would be outdated quickly. You can easily compare brokers by doing searches like these (please note that these sites probably get kickbacks for their links):

stocktrader.com/compare-online-brokers

thestreet.com/online-trading/compare-best-online-brokers.html
en.wikipedia.org/wiki/Comparison_of_online_brokerages_in_the_United_States

Next, I looked at the disruptive companies.

I compared Robinhood to Stockpile as both companies seem similar at first glance. I found that they cater to folks seeking free to low-cost commissions with none of the bloat found at most traditional brokers. Both companies have simple, no-frill interfaces and are simple to set up. Robinhood offers free trades and Stockpile offers trades for $0.99. As of now, Robinhood does not offer custodial accounts. They are out of the runnings for now.

As a bonus, Stockpile offers a unique way to buy shares for others: stock gift cards (both physical and electronic). Stockpile seems to be the best choice for me and my needs at this time.

If I make one trade a month at $0.99, I will pay $11.88 in commissions a year. As a bonus, I will be dollar-cost-averaging the purchases throughout the year.

Conclusion:

If you are able to use your existing relationships with your brokers, by all means go for it. I think that for someone who is starting out or for someone who doesn’t have a relationship with existing programs, Stockpile might be a good place to start. I’ll post any updates if there are any to report.

Thoughts?

2 Likes
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Hi Nikola,

I’d strongly consider against anything fancy or disruptive companies. You wan’t something simple that you know will be around when the child is an adult.

I’d suggest using Vanguard and putting the money into a Total Stock Market fund. The actual mutual fund, not an ETF. And set up automatic ACH contributions from your linked checking account.

Alternatively, find a brokerage that allows fractional share ownership and put 100% into Berkshire Hathaway so you’ll never have to worry about taxes, unless they decide to start issuing a dividend. Buffett will die before the child is an adult, the stock price will drop, but you’re dollar cost averaging anyway and in the long-term, it’s not likely Buffett’s death will hurt the company too much.

5 Likes
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Most major brokerages offer free UTMA accounts (Schwab, TDA, etc), and have reasonable commissions. I would caution against your requiring fractional stock shares - few do this and honestly if you can’t buy a fraction of a share worth $50, you’re not missing out on much until you make the next investment contribution. I’d suggest either going with a mutual fund account directly with Vanguard, assuming they support UTMAs (not sure), as those have no fees or minimum investment amounts, or picking ETFs off a list of those offering commission free trades (which avoids the DRIP requirement).

If you really want fractional shares, I think Motif and CapitalOne’s (the old sharebuilder) are the only ones that come to mind. Capital One does support DRIP, which has been an annoyance more than not honestly…

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Hi @TripleB,

Thanks for your reply. I thank you for your input and how you want a company to be around for a while. Stockipe is SIPC protected up to $500k. I certainly want to work with a company that is stable and is likely to be around for the years to come.

Vanguard is a great company. Their Total Stock Market mutual fund is a great product but it requires a $3k minimum investment.

Setting up the automatic investments from your bank is a great way to make sure that it gets done every time without thinking about it.

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I imagine every brokerage is required to have SIPC insurance. It would be like a taxi company advertising that all of their drivers have car insurance.

Regarding VG’s minimums, if that’s the only thing keeping you from using it, then perhaps it’s not worth starting right now. If you are going to use less than $3k to start, then just put it in a high yield savings account until you hit the $3k minimum and move to Vanguard. If you’re putting in $100 a month for example, and starting with zero, then the stock fund isn’t going to grow much at the early stages anyway.

3 Likes
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Hi @xerty

Thanks for your reply. Yes, Vanguard supports UTMAs and they have minimum investment amounts for mutual funds.

Yes, you are right. Some of the major brokerages offer free UTMAs and some have reasonable commissions.

Thanks for bringing up Motif and CapitalOne. I looked into them but will check them out again.

I think that fractional shares are more of a convenience for me more than anything. Since I want to invest a fixed amount every month, I just want to purchase shares automatically whether the share price is above or below my fixed amount that particular month.

I do thank you for your suggestion to wait until the next month though.

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Vanguard has $3k min for most funds, but their STAR fund and their Target Retirement funds seem to have $1k mins. These will proabably suit your needs.

https://personal.vanguard.com/us/funds/snapshot?FundIntExt=INT&FundId=0056#tab=3

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Thanks @xerty for mentioning the STAR and Target funds. Perhaps when the account is large enough someone might want to move it over to these funds.

Thanks @TripleB for mentioning high yield savings accounts. I am starting with $50 to $100 a month and will see where it goes from there.

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I second Vanguard’s STAR accounts. It’s easy enough to move over into Total Market or the like once you hit $3K. Moreover, Vanguard’s fees AND customer service are top shelf - I can’t imagine being with any other organization for the majority of my assets.

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For creature comfort I’d suggest keeping the accounts at your existing broker(s) if everything else is equal.

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Hi FD,

Still doing research on this important topic.

I found out that taxable account might not be the best way to help out a child (in my situation).

Vanguard has a great page about time and compounding and it relates to what I’m trying to do here. I wish someone had done for me what I’m about to do. :slight_smile:

It seems like Vanguard has IRA options. They do not allow fractional share purchases though.

It is free to purchase Vanguard ETFs but you have to buy whole shares. I am considering doing this until the account reaches $1,000 and then I can transfer it to a Target fund where you can buy based on dollars invested instead of number of shares. The minimum is $1,000 for Vanguard Target funds.

I’m leaning towards Roth IRA accounts now.

Does anyone have any input or thoughts about going with Vanguard? I am a client and love them and what they stand for. Anyone set up taxable or retirement accounts for minors? If so, what advice or pitfalls do you have for other readers? If you could do it over again, what what would you do differently?

Thanks!

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a Roth is a good choice for minors, but they need enough earned income to qualify to make their annual contribution. That can be hard to justify for younger children.

1 Like
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I have my kids UTMA accounts with Schwab. I’m not sure if it’s because I have all my other accounts there too (checking, investment, and iras), but the kids accounts have no minimums, I started them with 50 bucks each and was able to buy s&p index funds, no commissions or fees as long as you buy Schwab funds and don’t sell within 60 days. Whenever they get a check for 25 bucks or whatever for a birthday I just throw it in and buy more, no additional fees, fractional shares are fine.

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My kids are grown now. I opened up their first UTMA accounts with the discount broker we had our account with at the time. For various reasons, we wound up transferring their accounts among a total of 4 different financial institutions before they became adults. We had no difficulty in transferring their money from one institution to another. They chose to stay with the institution they were last with when they turned 18. Of them all, only one had a B&M location near us. It didn’t prove to be advantageous one way or the other.

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Thanks @Zonacat! I wasn’t aware of Schwab’s UTMA accounts. For new accounts, the minimum is $100. Not bad! I checked out their Roth accounts and found out that you need $1,000 minimum to open the account. That is waived if you direct deposit $100 monthly. I’m definitely interested.

On another note, I found these links about IRAs for minors:

Keep the ideas flowing! I can’t wait to hear about your experiences!

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I found out that Schwab has Custodial IRAs available.

  • Minimum to open an account is $100
  • You can reinvest dividends for free
  • You can choose from 200 OneSource ETFs for free
  • No monthly fees

Downside:

  • No fractional share purchases

Other:

  • Paper/Phone application only

Is anyone doing this at Schwab or any other broker?

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You can never go wrong with Vanguard.

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I’ve been very happy with Schwab. Both of the kids have UTMA Intelligent Portfolios and 529 accounts. Moreover, I have my own personal accounts there and was recently moved to a personal consultant who takes care of anything I need - there was no fee for this.

Service has been outstanding and I like their ETFs.

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@fasttimes Yes, Vanguard is a great company! You can’t open up a custodial IRA over the internet and you can’t apply on paper. I called them after I couldn’t find a paper application and they just said use the internet to open an account. I couldn’t get past the point where they asked for the birthdate. Anything below age 18 results in an error. I found this to be strange because I read that Vanguard supports these types of accounts and has supported them for years.

@Danman I haven’t had any experience with Schwab. I do like that they have a special application form specifically for Custodial IRA accounts.

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@Tesla if you want, I can give you the name and number of my account rep. I’m sure he will help point you in the right direction.