The services provided by a stockbroker are essential. Unfortunately, that service isn’t free, and there are few options for purchasing stock without a broker. Having a brokerage account means paying brokerage fees, which can take a variety of different forms. As insignificant as these fees might seem, they are not: A 2 percent fee on an initial investment of $100,000 will cost you $170,000 in returns over the course of 25 years, according to Vanguard.
Consider how much each type of broker charges and what you’re getting in return before you open a brokerage account. Here’s a look at what brokerage fees are and what you need to know about them to get the most out of your broker.
What Is a Broker Fee?
Brokers act as an intermediary between the stock exchanges and you, the client. For their service, brokers will charge a broker fee. Broker fees are how brokers make money and cover the costs they accrue executing trades. But depending on what they’re charging and how they’re assessed, you could end up paying significantly more — or less — with different brokers. So understanding how much each fee structure will end up costing you is important. And, perhaps more importantly, some fee structures might create incentives for a broker to try to convince you to make trades that aren’t necessarily in your best interest.
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A commission is a fee charged for a transaction. These fees take the form of a percentage of the total transaction, usually between 1 and 2 percent for a full-service broker. For example, if your broker has a 2 percent commission fee on each transaction, a purchase of $100 worth of stock would include an additional $2 fee going to the broker.
Note that for full-service brokerages that also offer financial advising, a commission-based fee structure can create a financial incentive for them to steer you toward bigger trades that will make them more money. A good broker understands these conflicts and should actively avoid them, but it’s worth keeping this in mind when shopping for brokers or considering a trade.
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One of the simplest types of brokerage fees is a simple, flat fee charged on a per-transaction basis. This type of fee is especially common for discount brokers, who, unlike full-service brokers, simply execute trades on your behalf without offering the additional research and advising services of full-service brokers. With the advent of online trading, there are a lot of options for online brokers who offer commission-free trading in the form of a flat fee — usually $5 to $19.95 per trade.
Percentage commissions and per-transaction fees aren’t mutually exclusive, and some brokers might charge both. Most discount brokers will charge just a per-transaction fee, though, whereas commissions are more popular with full-service brokers.
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Account Maintenance Fee
An account maintenance fee is an annual fee assessed on your account, usually charged in the form of a percentage of the total assets under management — aka AUM — with that broker. So, if you have a brokerage account with $100,000 in stocks and bonds in it with a broker charging a 1 percent account maintenance fee, you’ll pay $1,000 for the year.
Annual account maintenance fees are usually between 0.25 and 1.5 percent for a full-service broker and about 0.5 percent for a discount broker, but those ranges are usually based on account size. Larger accounts are more profitable, so brokers will usually offer lower rates to larger accounts in an effort to bring in their business. If you’re investing with a very large sum, try and negotiate a better rate, if possible.
Some brokerages will charge a flat annual fee, particularly some online brokers. Annual fees tend to range between $20 and $50, but many brokers will offer ways to avoid them or phase them out for larger accounts. Vanguard, for instance, won’t charge an annual fee to those accounts that sign up for electronic statements or have more than $10,000 in AUM.
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