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How Are Brokers Making Money Off Investors And How Can You Reduce The Burden?

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How Are Brokers Making Money Off Investors And How Can You Reduce The Burden?

Picking the right mix of investments to add to your financial portfolio is a challenging undertaking. Most of us focus on the performance of financial instruments vis-a-vis the 52-week high and low figures, trading volume, bullish or bearish sentiment, charts, graphs, analyst opinions, et al. But there is a critical component to investing which is not always apparent to investors: brokerage fees, commissions, maintenance costs and so forth. As an investor, it is incumbent upon you to understand precisely what you are liable for, because excessive charges can adversely affect the performance of your financial portfolio. 

It's worth exploring the different types of brokerage fees that exist, and how you can minimize your expenses and maximize your returns. Once you find a reputable broker for trading or investing, the next step in the process is an in-depth understanding of the fees, charges, and commissions you will be paying. A hypothetical example brings everything into sharp focus: Imagine you had $1000 to invest in stock ABC. Assume that the stock appreciates by 12% during the course of the year, effectively growing to $1120. 

You then decide to sell the stock and pocket your profits. On paper, it appears that you have generated a profit of $120, or 12%. In the absence of brokerage and investment fees, this would be true however, let us assume that your broker charges $10 per month to maintain your account, and $8.50 per transaction. In this example, your annual charges for account maintenance amount to $120, and you have two transactions totaling $17 for buying the stock and selling the stock. At the end of the year, your profit is actually a loss of $17!

Of course, the aforementioned example is for illustrative purposes only, and most brokers will not charge you $10 per month in monthly maintenance fees, provided you do your homework. However, there are many things you really need to look out for to ensure that you are not simply filling the coffers of a multi-million-dollar brokerage, to your detriment. A few of the fees you are bound to come across with different brokers include the following:

  • Expense ratio fees – if you hold ETFs, mutual funds, or index funds, you will invariably be charged an annual fee by the broker. This is typically a percentage of your overall investment in that fund.
  • A brokerage fee – this is a real thing, and it is the amount that your broker will charge you to maintain your investment account. It includes a range of fees including annual fees, subscription fees, and trading platform fees. Don't think you can avoid the fees if you simply maintain a low profile with little trading activity – there is an inactivity fee too. Fortunately, you're not limited to choosing a broker with a high brokerage fee. Brokerage fees range from $50 - $75 per annum. In terms of trading platform fees, expect to pay anywhere from $50 - $200 per month. Inactivity fees could set you back anywhere from $50 – $200 every year
  • Management fees - a management fee is charged by a financial adviser to a client. These fees will vary from one brokerage to another, and it's worth paying careful attention to them.
  • Mutual fund fees – mutual funds are typically associated with transactions costs. Every time you buy a mutual fund or sell a mutual fund, you are probably going to incur fees with a broker. Be sure that you know about these fees upfront.
  • Paper statement fees – if you opt for snail mail delivery of your statements, expect to pay up to $2 for each statement. That could be $24 every year in paper statement fees.

Given all the fees you are likely to encounter in your trading and investing activity, it's worth understanding how much your overall investment will be degraded by the fees you pay. Below is a rudimentary chart which tracks 0% fees, 0.5% fees and 1.5% fees over a 30-year period assuming you deposit $6,000 a year into your brokerage account:

0% in annual investment fees will generate an account value of approximately $588,000 after 30 years, with $0 paid in fees

0.5% in annual investment fees will cost you approximately $51,700 over 30 years leaving you with an account value of $536,000

1.5% in annual investment fees will cost you $140,600 over 30 years, leaving you with an account value of $447,500

*These are approximate amounts

Are There Viable Solutions for High Brokerage Fees?

Absolutely! The issue is less about whether there are viable alternatives, and more about where you can find them. It's always a good idea to seek out discount brokerages which offer all the same trading and investment services as a traditional broker, with minimal fees. The lower you can go, the better provided that the brokerage offers you exemplary support, service and trading options. We scoured the literature in search of low-cost brokerages, a.k.a. discount brokers and one name consistently surfaced: Questrade. Rather than relying on Google's search algorithm, we decided to conduct additional research into the fee structure of this discount broker through a Questrade review. This is what we found:

  • Mutual funds cost $9.95 per trade
  • There are zero annual fees levied on these accounts
  • There are zero fees on exchange traded fund purchases (ETF)
  • When you purchase $5000 worth of bonds and GIS there are no fees
  • Fees for stocks are $0.01 per share, with a minimum amount of $4.95 and a maximum amount of $9.95 per trade
  • Investors who purchase precious metals like gold, silver, platinum and the like will pay $19.95 per trade

Of course, all of this holds true if you meet the minimum investment amount of $1000. However, it's important to note what services are available and what services are unavailable with discount brokers. Remember, the objective is to minimize your expenses so that you can generate higher profits on your investment. Automatic portfolio rebalancing is a useful value-added benefit which is not available at this discount brokerage. However, there are multiple different types of accounts which are easy to manage, including contracts for difference (CFDs), foreign exchange, margin accounts, TFSA, and RRSP. This Canadian brokerage is certainly in the running among the most cost-effective brokers on the market.

Cut Your Losses & Make the Switch to a Reputable Discount Brokerage

Low cost brokers make the world of difference to your portfolio. This is immediately evident when you look at the comparative statics with other brokerages like Scotia iTrade, TD Direct, and RBC, all of which charge substantially more per trade, per ETF purchase, per options contract, and unregistered account fees. If you can significantly reduce your overall brokerage fees and commissions, you can reinvest your profits for even greater profitability and returns. It's always worthwhile poring over the list of reputable trading brokerages to ensure that your broker is working in your best interests. If they are charging fees on top of fees, there is no way that your investments will yield maximum benefit for you over time. Rather cut your losses and make the switch to a reputable discount brokerage.

Image sourced from Pixabay

Posted-In: ETF Investing Investors LogisticsNews Markets ETFs General

 

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