Broker Guide

Your Guide To Choosing A Broker

Stock Trade Commissions – The Fine Print

Posted by brokerguide on May 14, 2007

Prices at brokerage firms can be pretty confusing, and making it easy for people to understand commissions, cash yields and other fees was one of the main reasons we decided to launch Brokerguide. Equity commissions vary based on how much money you have at the firm, how often you trade, and the size of the trade. Sometimes owing the firm money matters too – loan balances can be counted in addition to asset balances when calculating commissions. Brokerage advertising often promotes their lowest priced offer – but like any retail offer, the fine print matters – and that may not be the rate you ultimately qualify for.

On the other hand, rates for mutual fund trades don’t depend on how much trading or assets a client holds at the firm. Mutual fund commissions are always more expensive than stock commissions because investors typically hold onto mutual fund shares for many years – as opposed to only months or possibly days for a stock trade. Admittedly, it’s a bit odd that assets and volume matter for some products and not for others, but that’s just the way it is.

Many mutual funds can actually be bought without paying a commission at all, via mutual fund “supermarket” programs. These funds are also known as “No Transaction Fee” funds. There’s nothing wrong with these funds, and if you are making investments on a regular basis over the year, it’s typically a good option.

We’ve done some of the legwork for you, gathering commissions from the major online brokers here. This week we’re writing about equities, but will wind our way through the product lines over time. We’re going to use a few personas as examples of what you will expect to pay, and options you can choose to help your self as a (1) Beginning Investor, (2) Established Investor, and (3) High Net Worth Investor.

Beginning Investor
Example: $20,000 account, 2 trades a month (24x a year)

Charles Schwab E*Trade Fidelity Scottrade TD Ameritrade
Online $12.95* $12.99 $19.95 $7.00 $9.99
Automated Phone $17.95 N/A $45.00 $17.00 $34.99
Broker assisted $37.95 $57.99 $55.00 $27.00 $44.99
* for first 1,000 shares $0.015 for each additional share

For the Beginning Investor Scottrade offers the lowest commissions across all three trading methods – web, automated phone, and speaking to broker. Note how much cheaper is to do business on the web – generally 1/3 of placing orders through a live broker.

Automated phone is a good option to be aware of if you are on the road. PC’s aren’t always available, and you can execute trades from any phone. Scottrade and Schwab price automated phone aggressively and both firms are good options for a basic trading account.

Let’s step back a minute and think about the big picture here. Your 24 trades will cost you a total of $168 (at Scottrade) and $478 (at Fidelity) a year. Let’s just call it $180 at Scottrade – maybe you make one or two of your trades by phone. If you keep $2,000 in cash or money markets – your trading costs are $180/$18,000 = 1% of your trading assets – or $478/$18,000 at Fidelity – effectively 2.7%. As long as you didn’t go to Fidelity, that’s actually pretty good, considering that an active mutual fund will cost you between 1%-1.5% a year in expenses. So for the Beginners – commissions matter – and while they are not the only consideration – it’s a key issue to follow.

It’s really a testament to the power of the Internet that stock commissions – which were about $500 a trade in the 1970’s are running around $10 bucks. That’s right – $500 a trade – in today’s dollars that’s more like $1,500. Back then you really had to be rich to trade stocks – but pioneers like Charles Schwab opened the door for the rest of us. Take advantage of the opportunity.

Established Investor
Example: $150,000 account, 4 trades a month (48x a year)

Charles Schwab E*Trade Fidelity Scottrade TD Ameritrade
Online $12.95* $9.99 $10.95 $7.00 $9.99
Automated Phone $17.95 N/A $45.00 $17.00 $34.99
Broker assisted $37.95 $54.99 $55.00 $27.00 $44.99
* for first 1,000 shares $0.015 for each additional share

Let’s run the same annual expense analysis – at the low end you would pay $336 at Scottrade and $621 at Charles Schwab. While it sounds like a lot, as a % of the portfolio – it’s only 0.44% at most. (Assuming you keep $10,000 in money markets or cash). Even with 2x the trades as our Beginner – the Established investor only winds up with a lower expense ratio than most actively managed stock funds.

It gets even better for the High Net worth investor who has $500k or more – commissions are lower, and as a percentage of assets, sensible trading volume shouldn’t cost more than a quarter of a percent.

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What’s A Broker?

Posted by brokerguide on May 14, 2007

This might seem obvious, but you can skip this post if you know this. In our case, broker is short for BROKERAGE and when we say BROKER, we are speaking of a COMPANY that holds investor’s assets, enabling them to trade stocks, mutual funds, bonds and invest in cash instruments. Brokers might also provide banking services like checking accounts and mortgages.

You’ll hear the term broker also applied to individuals that work within these Companies. These folks are indeed brokers and many of them possess state and national licensing that enables them to serve you and your money management needs. There are good brokers and bad brokers, just like any other profession, but we aren’t here to discuss them, rather the companies they work for.

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    Posted in The Basics | Leave a Comment »

    Choosing A Broker

    Posted by brokerguide on May 14, 2007

    Given the nature of our site, I would love to start with a declaration like: “Choosing the wrong broker can doom you to a retirement in a transient hotel eating pork and beans.” While that would make our content seem indispensable to your financial future, we can’t really do that. There are a lot of brokers out there and depending on your needs, many of those brokers can indeed be a “good” broker for you.

    Still, choosing the right broker is an important step in securing your financial future. Depending on your needs, some brokers are indeed better than others. If you wish to seek advice from a professional, your universe narrows. If you trade frequently, pricing might be the key factor in where you do business. If you want a one stop shop where you can invest, bank and get a mortgage, again, your universe narrows.

    To determine what firm is right for you, start with a few basic questions:

    1) Do I know what I want to invest in? If so, what? Stocks, bonds, mutual funds?
    2) What do I value the most in a brokerage relationship? Customer service, pricing, rate of return on my cash, one stop shopping?
    3) Am I looking for someone to invest and manage my money for me? Or do I want to do it myself?
    4) Do I want to actively use the internet to manage my investments?
    5) Do I need a branch nearby?
    6) Is the size of the firm (and thereby financial security) important to me?

    These questions are a good place to start, but you’ll have more. We believe this site will be a valuable tool in helping you choose the firm that is right for you.

    Posted in The Basics | Leave a Comment »

     
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