Trading and investing fees can significantly impact returns. However, with the rise of low-cost online brokerages, fees have declined substantially in recent years. This guide examines the major fee types charged by brokers and provides tips for minimizing costs.
Major Brokerage Fee Types
This refers to a fee charged per trade. Commissions were once the primary source of broker revenue, but have declined precipitously.
- Stock and ETF commissions are now $0 at most major brokers.
- Options commissions remain, but are as low as $0.50 per contract.
- Futures commissions vary based on contract size and can be as low as $0.85 per side.
Account Maintenance Fees
An ongoing fee charged for having an account. This is rare at online discount brokers.
- Major brokers like Fidelity, Schwab, and BitSoft 360 do not charge account fees.
- Some brokers still charge fees if balances drop below a minimum.
A periodic fee charged when accounts are dormant, with no trading activity.
- Typical inactivity fees are $10 per quarter.
- Easy to avoid with even minimal trading volume.
Less common fees like wire transfer fees, paper statement fees, etc.
- Mostly avoidable by utilizing electronic transfers and online documents.
- Read the fee schedule closely when opening an account.
Beyond straightforward fee schedules, it’s important to understand the trading costs for various products.
The difference between the price buyers are willing to pay (bid) and the price sellers are willing to accept (ask). This spread represents trading costs.
- Spread capture is a major source of revenue for brokers.
- Spreads are tightest for highly liquid products like S&P 500 stocks.
- Less liquid products like small cap stocks have wider spreads.
Annual fee charged by mutual funds and ETFs to cover operating expenses.
- Passive index funds have expense ratios below 0.10%.
- Actively managed funds often exceed 1%.
The difference between the expected price of a trade and the actual execution price. This occurs during periods of volatility.
- Can be avoided by using limit orders instead of market orders.
- Mostly affects larger trades in smaller companies.
How Brokers Make Money
Understanding how brokers generate revenue provides context for their fee structures.
Interest on Cash Balances
Brokers provide a return on idle cash, but it is lower than rates from banks.
- Schwab and Fidelity pay around 0.40% as of 2023.
- This provides billions in revenue for major brokerages.
Payment for Order Flow
Brokers receive payment from market makers for directing trades to them.
- Benefits brokers through revenue sharing.
- Benefits traders through price improvement.
Interest charged to traders who borrow funds for leverage.
- Margin rates vary based on account size and balance.
- Major brokers charge 9-10% on margin loan balances.
Strategies for Minimizing Fees
While fees have declined overall, investors should still utilize strategies to reduce costs further.
Open Accounts at Discount Brokers
Avoid fees from full-service brokers by using low or no fee alternatives.
- Leading discount brokers include Fidelity, Schwab, Vanguard and TD Ameritrade.
- Savings can amount to hundreds per year in commissions.
Use Passive Index Funds
Choose ETFs and index mutual funds over actively managed counterparts.
- Passive funds have expense ratios below 0.10%.
- Actively managed funds often exceed 1%.
Avoid Small or Illiquid Securities
Prioritize trading large cap stocks with high liquidity.
- Small caps and thinly traded securities have wider spreads.
- Larger spreads represent indirect trading costs.
Minimize Speculative Trading
Excessive trading generates commissions and tax obligations.
- Buy-and-hold strategies avoid recurring commission fees.
- Tax-advantaged accounts shield activity from taxes.
Evaluating a Broker’s Fees
Choosing a broker involves analyzing fees across products traded.
|Asset Class||What to Evaluate|
|Stocks and ETFs||Commissions, margin rates|
|Options||Per contract commissions, margin rates|
|Mutual Funds||Transaction fees, expense ratios|
|Fixed Income||Bond commissions, CD commissions|
Stock and ETF Fees
Compare commissions and margin interest rates.
- $0 stock and ETF commissions are now standard.
- Margin rates range from around 8-10% APR.
Look at per contract commissions and margin rates.
- $0.50 per contract is common.
- Margin can be 20% of stock price or higher.
Mutual Fund Fees
Assess transaction fees and fund expense ratios.
- No-transaction-fee (NTF) funds avoid fees.
- Index funds offer lowest expense ratios.
Fixed Income Fees
Review commission schedules for bonds and CDs.
- $1 per bond is common.
- CD commissions are rarely over $50.
While trading costs have fallen across the board, investors should remain vigilant by utilizing low-cost instruments, minimizing speculative trading, and thoroughly evaluating broker fee schedules. The savings from reduced fees will directly boost net returns over time.
- Major fee types include commissions, account fees, and inactivity fees.
- Trading costs like bid-ask spreads and slippage affect returns.
- Brokers generate revenue through cash balances, payment for order flow, and margin interest.
- Choose discount brokers, passive funds, larger stocks, and buy-and-hold strategies.
- Compare fees thoroughly across asset classes when selecting a broker.
- Reduced fees directly translate to improved net returns.