Look for these hidden broker fees.
Every cent investors save on fees and other costs is one less cent they have to squeeze out of the market before retiring, buying a home or achieving any other major financial goal. Investors that use online brokers can enjoy low trading commissions and can avoid the types of exorbitant fees certain active money managers charge. Unfortunately, even investors managing their own portfolios in an online trading account may be paying more in fees than they realize. In addition to standard trading commissions, here are seven other hidden broker fees to watch out for.
Margin fees
Most brokerages allow customers to borrow up to 50 percent of the purchase price of a stock. While that margin may seem like a great deal, it comes at a price. Online brokers can charge margin interest of up to around 9 percent. In that scenario, stocks purchased on margin would need to deliver 9 percent annual returns just to offset margin fees. Short sellers are also subject to margin fees on all open short positions. To make matters worse, most brokers warn users that margins fees are subject to change at any time without notice.
Custodial fees and inactivity fees
Credit card users are all too familiar with these types of periodic fees, which are intended to pay for administrative services and upkeep costs. Sometimes, avoiding these fees is as simple as choosing a type of account, such as an individual retirement account, that may not be subject to fees. Some brokers may waive these fees for investors that meet a certain minimum balance threshold. Inactivity fee exemption typically requires a certain number of trades per quarter or year. Fortunately, in recent years, a number of brokers have been doing away with these types of fees all together.
Expense ratios
Retirement investors are understandably drawn to brokers offering commission-free exchange-traded funds. However, even these funds come with their own built-in fees. While investors are cutting down on trading commissions by owning these ETFs, the funds themselves have annual fees called expense ratios that they charge every shareholder. Each year, the company that operates the fund will deduct a certain amount of the fund’s assets to cover management and operating costs. Ironically, some of those costs come from paying brokers to include the funds as commission-free ETF offerings in the first place.
Account transfer fees
It can be expensive to transfer assets from one account to another. Brokers often charge $75 to $100 to transfer assets to another brokerage. In the digital age, this fee is essentially a penalty for switching to a competitor. Investors may be able to avoid this fee by simply selling their stocks, transferring the cash proceeds to a bank account and then buying the stocks back in the new account. This approach can be particularly useful if the new account has an introductory commission-free trading offer. However, investors should be mindful of the potential tax implications of this work-around approach.
Robo-advising fees
Most investors who use robo-advising services such as Wealthfront and Betterment are aware that they are paying a fee for the service. What they might not be aware of is that they are also paying the expense ratios of the funds the robo-advisor buys and sells. For example, Wealthfront charges customers a 0.25 percent fee for accounts holding at least $10,000 of assets. The expense ratios of the ETFs the Wealthfront robo-advisor trades average 0.12 percent. While the combined fee of 0.37 percent is modest compared to what most human managers would charge, it’s more than robo-advisor clients may realize.
Option trading fees
Most online brokers charge a flat rate for stock trades, but options trading is a bit different. In addition to the flat commission, brokers often charge an additional fee based on the number of contracts traded. TD Ameritrade, for example, charges a base commission of $6.95 per option trade plus 75 cents per option contract. For investors making large trades or those trading inexpensive option contacts, it’s easy for that $6.95 commission to turn into a pricey $10 commission. Investors who plan on doing a lot of option trading should make sure to read the fine print on those commission fees.
Premium access fees
The online brokerage business is fiercely competitive, and all the top platforms are constantly trying to outdo one another in terms of high-quality data, cutting-edge tools and professional-grade research. These brokers are quick to advertise these advanced offerings, but they may be pricier than customers realize. For example, Interactive Brokers offers real-time market data on global exchanges and real-time news feeds from a variety of services. However, the professional-grade research data bundle costs $155 per month and premium newswires can cost up to $600 per month. Most long-term investors should only consider a broker’s standard, free tools and research offerings.
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7 Investment Fees You Might Not Realize You’re Paying originally appeared on usnews.com
