This guest article was written by Neda Jafarzadeh, a financial analyst with NerdWallet Investing. NerdWallet Investing helps investors select better mutual funds for their 401(k) plans, find the best 529 plan, and make smarter investment decisions overall.
Investing online is a great way to grow your assets but it’s also has become a huge industry for brokerage firms looking to do the same at your expense. While you may need a broker to assist you with placing your trades, you can still make sure he keeps his hands out of your pockets as much as possible. Here are a few ways that your current brokerage firm might be taking more than their fair share:
1. Charging high rates for things you don’t want, know about, or can get elsewhere
What do Scottrade, TD Ameritrade, TradeKing, and Cobra Trading have in common aside from providing brokerage accounts? They all use the same third parties for trade execution services: Knight, Citadel, UBS and Citigroup. Scottrade and TD Ameritrade are name-brand brokerage firms that charge high rates on trades while TradeKing and Cobra Trading are deep discounters offering the same service at a lower cost.
You might think that another way to avoid paying a lot for execution fees is to limit your trading, but that won’t save you either. Many firms charge annual account fees and inactivity fees - penalties that you’ll only see in the fine print.
In addition, you may also be paying up for real-time market information. While most data can be up to ten minutes old, which isn’t a problem unless you’re a day trader, you may unnecessarily be paying more for real-time information.
2. Discount brokerage firms are every bit as reliable as household names
If you’re looking to save some money but are choosing a brand-name broker because you think the service will be more reliable, think again. Deep discount firms are required to be registered with the SEC and retain membership with FINRA (Financial Industry Regulatory Authority) and SIPC (Securities Investor Protection Corporation). Translation: Every brokerage firm is held to the same stringent regulations, meaning that each firm is as trustworthy as any other.
While the levels of customer service may vary, every firm is essentially providing the same service under the same requirements. So what are these name-brand brokerage firms charging you so much more for? They use the money to pay overhead costs including covering their advertising budgets. According to a NerdWallet study, the three largest online brokerages (Schwab, TD Ameritrade, and E-trade) spent only 12% of their expenses on trade execution with the rest going to cover overhead costs including paying 11% of the money on their advertisements. By comparison, discount brokers spent an average of 59% on trade execution.
3. They’re not telling you that some fees are negotiable
Think of online brokerage firms as open markets instead of chain retail stores – the prices are not set in stone. Since most firms provide the exact same services (see above), they know that you can take your business elsewhere and are often willing to work with you to keep your business – provided your business is worth it to them. If you have at least $50,000 in a trading account or execute at least ten trades a month, things like account fees, trade commissions, margin rates, and data subscriptions may be negotiable. Take the initiative and approach your firm about receiving a better set of terms, and you’ll notice the savings immediately.
