In this article:
- What Are Brokerage Fees?
- What Are the Different Types of Fees Brokerages Charge?
- How to Plan for Brokerage Fees
Brokerage firms provide a platform for investors to buy and sell investments, and many also provide resources and research to help you make better decisions about your portfolio.
But depending on the type of account you have and how you choose to invest, you may be subject to a variety of fees, which could impact your investment return. Understanding these fees can help you determine which brokerage firm to choose and minimize your potential costs.
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What Are Brokerage Fees?
Brokerage firms are essentially middlemen that connect buyers and sellers of investment securities, including stocks, bonds, exchange-traded funds (ETFs), mutual funds and more.
Many brokers charge fees or commissions to process certain investment transactions or in exchange for specialized services. Brokerage fees can vary depending on the type of broker you choose.
For example, discount brokers that don't provide a lot of hands-on guidance typically charge fewer fees. In contrast, full-service brokerage firms that offer personalized guidance and access to specialized services typically charge more.
Even if they don't look like a lot on the surface, brokerage fees can add up over time and significantly impact your investment returns over the course of several years or decades.
What Are the Different Types of Fees Brokerages Charge?
Depending on which type of broker you choose, your account and your investment activity, you may come across a variety of fees. Here are some of the more common charges.
Online Brokerage Fees
When working with an online broker, you're essentially on your own, so fees are relatively low. Online brokerage account service fees are typically $0, but some may charge a small annual fee. If you're trading stocks, ETFs and mutual funds, you'll typically be able to do so without paying a trading commission.
However, online brokers may charge a trading fee for other types of securities. Examples from top online brokers include:
| Brokerage Trading Fees | |
|---|---|
| Type of Security | Cost |
| Option contracts | $0.50-$0.65 per contract |
| Futures contracts | $1.50-$2.50 per contract |
| Foreign stocks | $50 per transaction |
| Foreign currency | Up to 1% of the principal |
| Secondary-market bonds | $1 per bond |
| Secondary-market certificates of deposit | $1 per CD |
| Mutual funds | $0-$75 per purchase |
If you transfer your money to a different broker, you may be charged a fee of up to $75, but some brokers skip this fee. You may also be charged for other account features, such as paper statements, wire transfers and check orders.
Keep in mind that if you buy a mutual fund or ETF, you'll also be subject to an expense ratio, which is an annual fee charged by the fund provider as a percentage of your holding. However, this fee is separate from the brokerage fee.
Discount Brokerage Fees
Discount brokers often operate through online platforms, so services and costs are generally similar to those of online brokers.
However, discount brokers may also offer additional services that basic online brokerage firms don't. For example, you may be able to make trades over the phone. Trades made with the broker's automated system may cost you between $5 and $12.95 with top brokers, while a transaction assisted by a representative may cost between $25 and $32.95.
Discount brokers may also offer robo-advisor services, which provide you with a portfolio managed by computer algorithms based on your risk tolerance. Robo-advisor fees range from 0% to 0.35% of your balance annually at the biggest brokerages.
Full-Service Brokerage Fees
Full-service brokers offer a wide range of products and services, but the main feature that sets them apart from other types of brokerage firms is human guidance.
If you want one of the broker's advisors to manage your portfolio and make investment decisions on your behalf, you'll typically pay a percentage of your portfolio's value each year. This fee can range from 0.20% to 1.5%, depending on the broker and type of management service. Some may even charge a flat monthly fee instead of a percentage.
Note that these fees are different from the fees you may pay an individual financial advisor to help you manage your portfolio. Financial advisors who aren't connected to a specific broker may charge a flat fee, a trading commission, a percentage of your assets under management or a mix of each.
How to Plan for Brokerage Fees
As you can likely tell, the fees you pay to a brokerage firm will depend largely on which broker you choose and the services you choose. Here are some steps you can take to understand the impact of brokerage fees:
- Determine what you want: If you want to manage your own portfolio and minimize costs, you may be able to get by using a broker who charges very few or even no fees. But if you want to invest in certain types of securities or take advantage of additional services, you may need to prepare yourself for higher costs.
- Shop around: Take some time to research several brokerage firms to understand which services and investment options they provide. If you find more than one that offers what you're looking for, look up the fees they charge for those features.
- Calculate your costs: Review the fees charged by different brokerage firms for the services you want and calculate what your cost would be each year, both in terms of dollars and percentage of your portfolio.
- Look beyond the fees: While fees can eat into your investment gains, it can be worth paying a little more for additional features. In some cases, it can make sense to pay extra in exchange for better service.
If you have a relatively low investment balance, it may not make sense to pay a full-service broker to manage your portfolio. Opting for an online or a discount broker can help you keep your costs to a minimum.
As your balance grows, however, paying a full-service brokerage firm to actively manage your portfolio could potentially improve the efficiency of your portfolio and your overall returns, even after accounting for the fee.
The Bottom Line
Whether you're just getting started with investing or you've been in the market for a while, it's important to understand how fees are impacting your portfolio's returns. Consider reviewing your current situation to determine how much you're paying and whether the cost is worth it.
Then, take some time to think about what you're looking for in a brokerage firm and research and compare several options to determine how much you're willing to pay for the services you want.
