When you invest in stocks, bonds, or mutual funds, you typically do so through a brokerage firm. These firms charge fees for their services, which can eat into your investment returns. It's essential to understand how brokerage fees work so that you can make informed investment decisions.
This post will explain the most common types of fees charged by brokerages, typical amounts, and how these fees can impact your investment returns.
What Are Brokerage Fees?
A brokerage fee is a charge determined by a brokerage for the services rendered in connection with the purchase or sale of securities.
These services may include executing trades, providing research and investment advice, and maintaining an account. The fee depends on the service provided, the type of brokerage account, and the broker's commission schedule.
There are several different types of brokerage fees, which we will discuss in more detail below. The most typical brokerage fees include:
Broker Commission
A commission is a fee charged by a broker for executing a trade. This fee is typically a percentage of the total value of the trade and is paid by the investor to the broker.
Account Maintenance Fees
Many brokers charge a monthly or annual fee to maintain an account. This fee covers the costs of keeping the account open, such as providing customer service and offering research and advice.
Platform Fees
Some online brokers charge a platform fee. This fee covers the costs of using the broker's trading platform and is typically a flat rate.
Inactivity Fees
Some brokers charge a fee if an account is inactive for a certain period of time. This fee is intended to discourage investors from keeping money in a brokerage account without using it.
How Does a Broker Fee Work?
A brokerage company charges trading fees for managing different trades, including buying and selling stocks, ETFs, mutual funds, cryptocurrencies, and other securities. It depends on each brokerage company how it's going to set its fees. For example, some brokers charge only transaction fees for mutual funds, while there are no fees on trading stocks or ETFs.
Types of Brokerage Fees
Brokerage fees come in two main forms: commissions and account fees. Brokerage commissions are charges that you pay when you buy or sell an investment, and these can vary greatly depending on the type of investment and the broker you're using.
Brokerage account fees, on the other hand, are usually flat monthly, quarterly, or annual charges that cover the costs of maintaining your account with a particular broker.
Most brokerage fees are charged in one of two ways: monthly or quarterly. The most common fee type is the monthly fee, typically a flat rate set by the brokerage.
Many online brokers also charge quarterly fees, which are usually based on a percentage of the assets under management. For example, an average broker fee might be 1% of the assets under management.
In addition, some brokerage account fees can be charged annually.
While some brokers will have both account and commission fees, others may only charge one or the other. There is even commission-free trading for certain types of investments. So, it's important to shop around and compare different brokers before settling on one.
There are several methods by which brokerage firms charge their fees:
- full-service broker,
- discount broker,
- online brokerage.
What Is a Full-Service Broker?
A full-service broker is a type of broker that provides a personal investment advisor to help make investment decisions. This advisor provides investment advice and executes trades on behalf of their clients. A full-service broker is a perfect choice for those who want to tailored brokerage service.
An average brokerage fee for a full-service broker is $150 or between 1% and 1.5% of the total value of the assets under management each year (AUM).
With a good robo-advisor, you don’t need to know anything about trading to earn money with your investments. Full-service brokers are similar but even better because you’ll get real human support for managing your portfolio.
Full-service brokers typically charge higher fees than discount brokers (and robo-advisors), but they offer more services and hand-holding for beginner investors. However, you should remember that a full-service broker still means that you're dealing with sellers.
People use a full-service broker for many reasons. The main one is not having the time or energy to manage their investments. They usually don’t mind paying this type of brokerage fee to have somebody to talk to about their investment decisions and want experienced brokers to provide them with investment ideas and guidance.
What Is a Discount Broker?
A discount broker only executes trades on behalf of their clients. This type of broker does not provide any advice or opinion on investments. Leading discount brokers typically charge lower fees than full-service brokers, but they offer fewer services. A discount broker is perfect for those who are comfortable making their own investment decisions and don't need hand-holding.
A typical discount broker fee is between $7 and $10 per trade.
What Is an Online Brokerage?
This type of broker offers online trading platforms to its clients. They are a perfect choice for those who just need a place to trade but do not require additional help with their portfolio.
Online brokerages typically charge lower fees than full-service or discount brokers, but they offer fewer services. They are ideal for experienced brokers who can handle their investments without any hand-holding.
As with discount brokers, a typical online brokerage charges between $7 and $10 per trade. Many online brokerages also offer commission-free trades for select securities. For example, Robinhood provides commission-free transactions for US stocks and Exchange-Traded Funds (ETFs).
While some brokerages have begun to charge no trade commissions at all, they make up for it in other ways. For example, they may charge higher broker fees for mutual fund trades or require a minimum account balance.
How Do Investment and Brokerage Fees Affect Returns?
Investment and brokerage fees can have a significant impact on returns. For example, let's say you invest $10,000 in stock, and it goes up 10% over the course of a year. If you're paying a 1% annual fee, then your net return would be 9%.
To put it another way, if you're paying a 1% brokerage fee and your investment goes up 10%, then you've effectively given up 1% of your return to the broker.
Investment fees are just one of many factors that can impact returns. Other factors include the type of investment, the market conditions, and your personal risk tolerance.
Other Types of Brokerage Fees
In addition to the fees charged by your broker, there are also other trading fees that may be associated with your investment transactions. These can include charges for mutual fund transactions, sales loads, 401(k) fee disclosure, and more.
When it comes to mutual fund transactions, two types of fees may be charged: sales charges and redemption fees. Sales charges, also known as loads, are fees charged when you purchase a mutual fund. Redemption fees are charged when you sell your mutual fund shares.
401(k) fee disclosure is another important aspect to consider regarding brokerages. Many 401(k) plans come with hidden fees that can eat into your investment returns.
The Bottom Line
When it comes to investing, there are a lot of different fees that can eat into your returns. Now that you are familiar with the meaning of a broker fee and the typical amount you can expect, it will be easier to plan your future investments.
Once you've opened an account with a broker, you'll usually be able to trade online or over the phone. If you need help making investment decisions, purchases and sales, consider paying additional fees for a full-service broker.
Remember that brokerage fees are just one part of the overall costs of investing. While they can eat into your returns, they shouldn't be the only factor you consider when making investment decisions.
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