What are Brokerage Fees?
You open up your brokerage account and decide to buy 10 shares of ABC Company, priced at $10. When you submit your order, the total fee for the transaction is $104. Something doesn’t add up. Where did the extra $4 come from? If you check the details of the transaction, you’ll likely find that the extra $4 accounts for a brokerage fee.
Brokerage fees are an everyday part of transacting securities for retail and institutional investors alike. Brokers simplify the buying and selling of securities by acting as an intermediary. That service doesn’t come free: it’s paid for by way of brokerage fees.
Brokerage fees vary in amount and how they’re levied. Investors need to get familiar with their brokerage’s fee structure before transacting securities. These fees increase costs and diminish returns, and can impact the total return on investment for investors if they’re left unaccounted for.
What do Brokerage Fees Cover?
Brokers provide an array of products and services to customers. Chiefly, they facilitate transactions, which require effort in the form of negotiation, sale, purchase and delivery of securities. On top of this, they offer investment advice, tools, resources, information and products designed to help investors maximize their portfolios. In short, brokerages deliver robust investor support, and brokerage fees serve as compensation for that support.
Types of Brokerage Fees
The fee structure for every broker is different and depends largely on the services provided. Discount brokers that only facilitate transactions will likely have fewer and lower fees than full-service brokerages that provide an array of financial services. Moreover, different types of transactions can incur different fees. Typically, most brokerages have the following types of fees:
- One-time fees. These can include setup fees for accounts or trades, or for establishing portfolio allocations. These fees are usually flat-rate dollar amounts. For example, Charles Schwab charges a one-time $300 setup fee for a Schwab Intelligent Portfolios Premium account.
- Ongoing fees. These fees accompany higher-level services such as active portfolio management. They can take the form of flat rate amounts or percentages. For example, Fidelity charges a $3 per month fee for its Fidelity Go robo-advisor up to $49,999 and 0.35% per year for $50,000 and above.
- Transaction (commission) fees. These fees tend to coincide with trades such as buying or selling securities, or writing or buying options contracts. For example, E-Trade charges $1.50 for futures contracts.
- Service fees. These fees apply to specialty services and tend to kick in when certain broker stipulations are or aren’t met, such as account minimums. For example, T. Rowe Price charges a $30 annual account maintenance fee for accounts with less than $50,000.
Again, every broker will charge different fees for different services and stipulations. Every broker will list its fee structure on its website.
The Rise of Low-Fee, Zero-Commission Brokers
Today, most major discount brokerages have moved to a low-to-no fee structure. This is the result of disruptive online brokerages that pioneered zero-commission trading. Customers flocked to zero-commission platforms because of free trades, which forced larger institutions to adopt similar policies to maintain market share.
While almost every major broker maintains a low-to-no fee structure today, this only extends to basic accounts. While listed stocks and ETFs may trade free, most brokerages still charge fees for OTC trades, derivatives, bonds, foreign stocks and depository receipts, and other financial products still have commission and transaction fees.
Not only has the shift to zero-commission trading made stock investing more accessible, it’s also allowed retail investors to keep more of their profits as they cultivate their own portfolios. Brokers have also been able to maintain fees for more advanced services, such as expert stock picking and portfolio cultivation, active asset management and other private services. In this way, the lines between full-service and discount brokerages have blurred.
Why Pay Attention to Broker Fees?
Fees are less of a profit-killer than they once were, but they still play an important part in calculating total return on investment. This is especially true when it comes to real estate and other tangible assets.
Say, for example, you use a real estate broker to locate and purchase a rental property. The broker charges 5% of the transaction price, which is $200,000. If your down payment on that property was 20%, you’re coming to the table with $40,000; however, you’ll also need to pony up an additional $10,000 for the broker. Your total upfront cost is $50,000—no small sum.
The same holds true for stock investing, only on a smaller scale. For example, a broker might charge 0.35% of total assets under management for an actively managed portfolio. If your assets equal $500,000, you’ll pay your broker an annual fee of $1,750. It might not seem like much, but it’s still a fee that demands consideration.
Are Broker Fees Worth It?
Investors don’t have a choice in how much they pay brokers; however, they can choose what to pay for. In the age of no-commission trades, most retail investors can transact without paying any premium. Yet, there are times when broker fees are often worth the value they provide. Paying for robo-advisors, active portfolio management or special transactions can yield profitable results that make the fees associated with them seem like a drop in the bucket.
Ultimately, it’s up to investors to understand their brokerage’s fees. Know what you’re paying for and what you’re getting, and decide if it’s worth it. While you won’t likely need to worry too much about astronomical fees in today’s climate, they’re still important to identify and factor into your total rate of return.