Online Brokerage Fee Schedule Analysis — Made Easy!

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<center>A brokerage firm can bleed you dry with fees if you aren't careful! (Complete photo credits are located at the bottom of this page.)</center>
A brokerage firm can bleed you dry with fees if you aren’t careful! (Complete photo credits are located at the bottom of this page.)

Welcome to the second installment of Earl’s step-by-step guide to selecting an online brokerage firm!  In this article, we’ll discuss the methods that online discount brokers employ to wrestle your hard earned money from you, wax philosophical about the relationship between brokerage firms and personal investors, and learn a handy little procedure for determining which firms offer the most cost-efficient services according to your personal investment strategy.  Moreover, I have constructed a table of values for your convenience, which includes some top online brokerage fee comparisons, located at the end of the page. (Isn’t that just swell?)

Right, then!  Let’s get to it:

Online Brokerage Fee Schedule Analysis — Made Easy!

In the previous installment, I showed you how to eliminate brokerage firms from contention by assessing their minimum balance and inactivity fee schedules, based on your income bracket and investment strategy. (If you have not yet read the first article in this tutorial, then I encourage you to do so.) Now, it’s time to thin out the herd even more by analyzing all of the other fees that brokerage firms impose upon their clients.  But first, I would like to take a moment to clarify something that seems to have a great many people confused, if the efforts of various brokerage advertising departments are any indication.

To put it plainly — your broker is not your friend!

Q: What Does He (Your Stockbroker) Really Think About Your Relationship?

A: He’s just not that into you.

You might think that effusive charm and toothy smile are a natural consequence of your special relationship, but the truth is that the rapport you have established with your stockbroker is all in a day’s work for him or her.  Make no mistake — brokers are salespeople.  Their livelihood is dependent upon the ability to leech money from clients, and therefore they can never be trusted to offer up impartial advice.  For example, it is at times in a person’s best interest not to invest — say, when he or she would be better served by paying off an outstanding debt first.  But, it has been well documented that brokers are more likely to steer people towards investing anyway, regardless of whether or not this is the best advice, in order to secure a commission.  And why not?  Traditional brokers are not hired for their investment expertise as much as their ability to close on a sale.1

It is for this reason that online discount brokers are such a welcome alternative to the so-called “full-service” firms (Goldman Sachs, JP Morgan, etc.) that for so long have dominated the investing landscape.  With an online brokerage, you need not ever deal with an actual, traditional, honest-to-goodness stockbroker if you do not wish it.  You may conduct all of your business with a firm electronically, by a few clicks of the mouse, and your trades are executed in cyberspace.  Of course, you may opt to speak to a live representative if necessary — for a price — but this is entirely optional.  Moreover, stockbrokers who work for online brokerages often work on salary, not commission, so you don’t have to worry as much about being a mark in some slow con.2

However, in spite of the vast improvements in price and the reduction in misleading financial advice (relatively speaking) over traditional firms, online discount brokers still exhibit the core characteristics that make a brokerage a brokerage.  Namely, the inevitable suction of your funds through fees, commissions, and other service charges.  Brokers will often try to distort this core motivation with a load of hooey about “putting people first,” or some other such nonsense.  Brokerage firms aren’t run by philanthropists, and were you suddenly to experience a reversal of fortune and lose all of your money, you would find your firm to be much less accommodating.

Despite what you may have seen on television, your Morgan Stanley rep is not going to come to your daughter’s graduation, you aren’t related to the E*TRADE baby, and that health-conscious jogging enthusiast at Charles Schwab didn’t leave his last job to work for a company that “cares.” (Allow me to offer my sincerest apologies to anyone who has a real life family member or friend who is employed by Morgan Stanley or Charles Schwab; also to that E*TRADE kid’s actual parents should they happen to be reading this.) Brokerage firms, whether they be full-service, deep discount, or discount — much like banks, tax collectors, and the people who determine the multiplier on your electric bill — are at best a necessary evil, and in the worst case are unethical price gougers.  The only thing that keeps a broker “honest” enough to provide a quality service at affordable rates, while in pursuit of your hard earned money, is the threat of competition from other brokerages coupled with (a reasonable amount of) government regulation.  Cynical?  Perhaps.  But, to believe otherwise is to invite deception.

Leonard Nimoy as 'Spock'
WWSS (What Would Spock Say?): “In order to ‘live long and prosper,’ you must approach online brokerage selection logically.”

In order to assess the relative advantages to you in opening an account with one brokerage versus another, you must first be able to see through the ploy of sentimentality that some firms blatantly use to try and snare clients.  Once you have removed emotion from the equation, you may logically evaluate the criteria that actually matter to decide which brokerages are optimized for investors of your situation, and are therefore best positioned to help you prosper.  To emphasize this point, I asked a noted proponent of logical thinking for his thoughts on the matter, and he graciously agreed to beam down and weigh-in. (See right.)

And if Mr. Spock’s expertise in the field of logic aren’t enough to convince you to heed his advice, then just consider that the man has blood the color of money! (Because Vulcans have green blood, get it? *knyuck, kynuck, knyuck*) In short, clever mascots are a dime a dozen, and are by no means an indication of the quality of an online brokerage.  If you find yourself starting to forget that the next time the E*TRADE baby does something cute, just repeat this mantra until you come back to your senses: WWSS? (i.e., What Would Spock Say?)

This is not to imply that you shouldn’t expect the employees of a firm to be polite, professional, and competent (We’ll talk about how to evaluate a brokerage’s customer service in article four of this tutorial).  Just don’t be fooled by the falsely empathetic message that seems to be the focus of many brokerage marketing departments of late.  View your relationship with a brokerage firm as you would view your relationship with a tool off of a workbench — i.e., You must select the right tool for the job in order to do it right. (No matter how pretty that new Phillips-head screwdriver looks, it won’t do you a lot of good for a project that requires a regular.)

Earl’s Insights:

Investor education is like kryptonite to stockbrokers!

'Kryptonite' by Dan SoloThe more that personal investors learn, the more the realization sinks in that we really don’t need brokers — certainly not to the extent that they would have us believe.

Online discount brokers are a streamlined and more attractive alternative, but remember that a broker is a broker, and a money-gobbling rose by any other name will still use its thorns to prick your wallet full of holes if you allow it.  As such, it is of the utmost importance to understand an online brokerage fee schedule in its entirety — before you open an account — in order to avoid unpleasant surprises.

Breaking Down an Online Brokerage Firm Fee Schedule

Unquestionably, the fees that online brokers charge their clients for various services are one of the most important matters to take into consideration.  Not every brokerage charges the same rates for trading stocks or options; nor does each firm employ an identical reference sheet for interest rates on margin loans.  Furthermore, some brokers charge transaction fees when a client purchases unsponsored mutual funds and ETFs, and this fee differs from firm to firm as well.

In the following paragraphs, we will discuss the importance of isolating a brokerage’s service fees based on your needs, and how to determine which firm would offer you the cheapest rates.  However, the very important considerations of minimum balance and inactivity fees are not included here, having already been covered in the first part of this tutorial. (As I mentioned earlier, if you have not yet read that first article, please go back and do so now.)

DeForest Kelley as Dr. McCoy
WWMS (What Would McCoy say?): “Dammit, man! I’m a doctor not a personal finance guru!!”

In Section I, I explained that brokerage firms used to be obligated to charge identical commissions.  That all changed on “May day” 1975, however, when the Federal Government deregulated the set rates that brokers must use for trading, and healthy competition between every firm in America promptly ensued.As a result, commissions have steadily fallen over the years, as brokers scramble to outdo each other in their perpetual struggle to win the lion’s share of clients.  Such is the efficient nature of capitalism, much to the savvy investor of modest means’ benefit!

It is relatively easy to suss out the lowest rates that brokerages charge for trading particular securities — stocks, options, etc. — as firms will invariably broadcast their most attractively priced services, in isolation, on websites and billboards for all to see.  However, do not be overly impressed with these attention grabbing advertisements, for they do not tell you the whole story.  Instead, analyze the entire fee schedule as it pertains to your investing style.

What kind of a trader are you?

For example, swing traders will not only be concerned with stock trading commissions but whether or not those commissions apply to every type of order (limit, stop, etc.) or only market orders.  Other areas of concern for such traders includes interest accumulated on margin loans, option call and exercise rates, and whether or not the firm charges for Level II and/or Level III quotes.  Day traders will be less concerned with the kinds of interest rates that they can get on margin loans (because they close out their positions every day), and conservative buy and hold investors will probably not care about option fees, margin rates, or the price of advanced quotes, as much as stock trading commissions and the transaction charges that a brokerage imposes when purchasing mutual funds or ETFs.4,5,6

Earl’s E-Z Online Brokerage Fee Comparison Method

To quickly make a list of brokerages whose services would be most cost-efficient for you, in order from cheapest to most expensive, follow this easy procedure for logical elimination:

(Note: Do not attempt this procedure until you have eliminated brokers from contention based on minimum account balance and trading inactivity fees, as discussed in the first installment of this tutorial.)

Pencil and Paper
Pencil? Check. Paper? Check. Rudimentary math skills? … Uh-oh.

1. With pencil and paper, make a list of the following fees that correspond to brokerage services necessary for your style of trading, and disregard the fees that don’t apply (Check the table at the end of this page to get you started with a few important fee comparisons between some of the more popular brokerages.):

  • Commodities
  • Forex commissions
  • Level II and/or Level III quotes
  • Option trading commissions, including exercise fees
  • Margin loan interest rates
  • Stock trading commissions
  • Transaction fees for purchasing non-NTF sponsored mutual funds and ETFs (This fee may be waived if the brokerage under consideration offers NTF funds and ETFs from the families that you plan to invest in.  See the third article in this tutorial for more!)

2. Next, place the top five firms offering the cheapest rates for each (relevant) fee category side by side in numerical lists, with the firm offering the lowest rate in the no. 1 slot and the firm charging the most at no. 5, etc.

William Shatner as Captain Kirk
WWKS (What Would Kirk Say?): “Seek out online brokerages with the most cost-efficient fee schedules, and boldly go where many investors have gone before.”

3. Compare these lists to see which brokerage(s) appear in all of the fee categories (thereby isolating the firm or firms that provide every service that you require), and cross out the firms that do not appear in one or more categories.

4. The numerical position in each fee column represents the “broker score” for that category.  Add up every firm’s scores for each category and create a new list for them, sorted in order from least to greatest.

You now have a logically sorted list of a handful of brokerages, beginning with the most cost efficient and ending with the most expensive, unique to your particular investment style. (For math wonks, a more sophisticated version of this method could incorporate weighted averages for each trading category, based on frequency of use.)

But wait!  We’re not done yet!  In addition to those listed above, brokerages also sneak a host of miscellaneous “service fees” into their contracts.  Many of these can be avoided by simply investing responsibly (not bouncing checks or purchasing worthless penny stocks, signing up for e-delivery instead of snail mail, etc.), but it is important to scrutinize a brokerage’s entire fee schedule, including miscellaneous and conditional charges, before signing on the dotted line — just in case there happens to be something buried in the fine print that will prove to be an obstacle as you execute your personal investment strategy. (Click here to see an example of a popular brokerage firm’s miscellaneous fee schedule: http://www.eoption.com/misc_fees)

Also, with regard to international stock markets: don’t compare apples to oranges!  If you plan to trade a heavy volume in foreign securities through one or more of the international stock markets, make sure that you include the correct commission rate in your calculations.  Also, if you use something other than market orders in your investment strategy, verify how much you will be charged for these.  Many online brokerage firms neglect to advertise the effect on fees that such variations have in their attention grabbing ads.

Summing it Up:

Money in your pocket
Keep more money in your pocket by choosing the right broker for your trading style!

One of the most crucial factors to consider when trying to decide whether a particular brokerage will be a good fit for you, is how the firm’s fee schedule affects your trading style.  A conservative investor has need of very different services from his or her broker than a more active trader.  In order to assess how a brokerage’s individual fees would apply to you specifically, it is necessary to combine all of the charges levied by a firm for the services essential to your investment style, while simultaneously disregarding charges for services that you do not intend to use.  In this way, you may personalize a brokerage’s fee schedule as it pertains to you specifically.  It is also worthwhile to analyze a firm’s miscellaneous fee schedule, in order to uncover any “fine print fees” that might adversely affect your investments.

Although a broker’s fee schedule is one of the most important considerations for determining whether or not to open an account with a firm, it’s not the only one.  For example, some would argue that a brokerage’s NTF mutual fund and ETF offerings are just as important.  For others, quality customer service, a user-friendly platform, and strong research tools are of comparable significance.  So keep your list of “fee finalists” handy (but don’t break out your checkbook just yet), because we’ve still got some work to put in before we find the best brokerage for your investment strategy!

Table: Popular Online Brokerage Fee Comparisons (Alphabetized by Broker)

Brokerages
*Options ($)
Margin Loan (%) for under $5,000
Mutual Fund & ETF Transaction Fees ($)
Domestic Stocks ($)
eOption
22.00
5.000
14.95
3.00
E*Trade
104.98
8.440
19.99
9.99
Fidelity
82.95
8.575
N/A
7.95
Firstrade
98.90
7.750
9.95
6.95
Interactive Brokers
70.00
1.590
14.95
1.00
Just2Trade
72.50
6.500
2.50
2.50
Merrill Edge
81.95
8.625
N/A
6.95
OptionsHouse
28.50
4.000
9.95
4.75
optionsXpress
137.95
8.250
9.95
8.95
Scottrade
151.99
7.750
17.00
7.00
ShareBuilder
121.95
7.700
19.95
6.95
Schwab
83.95
8.500
49.95
8.95
SogoTrade
70.00
6.750
N/A
3.00
TD Ameritrade
104.98
9.000
49.99
9.99
TradeKing
84.85
8.750
14.95
4.95
Vanguard
210.00
7.750
35.00
20.00
Wells Fargo Advisors
134.95
8.625
35.00
3.00

*Option prices for this table are bundled to include commission fees per order of a round lot of 100 contracts, as well as exercise fees (if applicable). **While your author has striven to make this list as accurate as possible at the time of writing, understand that brokerage fee schedules can and will change over time.  Be sure to verify this information with your broker of choice.

Sunset over New York City, home of the New York Stock Exchange
Sunset over New York City, NY: Home to Wall Street and the largest stock exchange on the planet- the New York Stock Exchange (NYSE).

<–[Previous] The 1st installment of Earl’s step-by-step tutorial for selecting an online brokerage, which includes: ‘Introduction’ & ‘Section I. Online Brokerage Firms Have Target Demographics’

[Next]–> The 3rd installment of Earl’s step-by-step tutorial for selecting an online brokerage firm, which includes: ‘Section III. Additional Online Brokerage Services — Mutual Funds and ETFs!’

Other Personal Finance Tutorials

If you enjoyed reading this, check out some of my related work listed above! You might also consider following me on Twitter (@EarlNoahBernsby) and Facebook, to receive notification the moment I publish a new article! Additionally, you can show support by simply by bookmarking this page, and/or by clicking Facebook and Twitter’s ‘Like’ and ‘Tweet’ icons seen at the beginning of this article! Thanks, –E.N.B.

Resources

  1. Brush, M. 8 secrets your broker won’t tell you [Internet]. [Place unknown]: MSN Money; 2010 Oct 19 [cited 2013 Oct 8]. Available from: http://money.msn.com/how-to-invest/8-secrets-your-broker-will-not-tell-you-brush
  2. Motley Fool staff. Full-service vs. discount brokers [Internet]. [Place unknown]: The Motley Fool; 2006 Feb 8 [cited 2013 Oct 8]. Available from: http://www.fool.com/investing/brokerage/2006/02/08/fullservice-vs-discount-brokers.aspx
  3. May day (brokerage deregulation) [Internet]. [Place unknown]: Wikinvest; [cited 2013 Oct 8]. Available from: http://www.wikinvest.com/wiki/May_Day_(Brokerage_Deregulation)
  4. Swing Trading [Internet]. Investopedia; [cited 2013 Oct 10]. Available from: http://www.investopedia.com/terms/s/swingtrading.asp
  5. Day Trading [Internet]. Washington, DC: U.S. Securities and Exchange Commission; [cited 2013 Oct 10]. Available from: http://www.sec.gov/answers/daytrading.htm
  6. Buy-and-hold investing vs. market timing [Internet]. New York, NY: Forbes; 2012 Dec 5 [cited 2013 Oct 10]. Available from: http://www.forbes.com/sites/investopedia/2012/12/05/buy-and-hold-investing-vs-market-timing/

Photo Credits

  1. ‘A brokerage firm can bleed you dry with fees if you aren’t careful!’ Source: stuartpilbrow, CC-BY-SA-2.0, via Flickr. 2008 Oct 13 [cited 2013 Oct 9]. Available from: http://www.flickr.com/photos/stuartpilbrow/2942333106/
  2. ‘Kryptonite.’ Source: Dan Solo, CC-BY-ND-2.0, via Flickr. 2007 Jul 17 [cited 2013 Oct 9]. Available from: http://www.flickr.com/photos/dannsolo/1172294338/
  3. ‘WWSS (What Would Spock Say?)’ Source: NBC Television, Public Domain (i.e., published between 1923 – 1977 without a Copyright noticelearn more), via Wikimedia Commons. Circa 1968 [cited 2013 Oct 8]. Available from: http://commons.wikimedia.org/wiki/File:Spock.JPG
  4. ‘Sunset over New York City, NY: Home to Wall Street and the largest stock exchange on the planet- the New York Stock Exchange (NYSE).’ Source: Darren Johnson, CC-BY-2.0, via Wikimedia Commons. 2012 Jan 30 [cited 2013 Oct 9]. Available from: http://commons.wikimedia.org/wiki/File:New_York_City_Panorama_Sunset.jpg
  5. ‘McCoy.’ Source: NBC Television, Public Domain (see Citation No. 3 above), via Wikimedia Commons. Circa 1970 [cited 2013 Oct 9]. Available from: http://commons.wikimedia.org/wiki/File:Deforest_Kelly_Dr_McCoy_Star_Trek.JPG
  6. ‘Pencil? Check. Paper? Check. Rudimentary math skills? … Uh-oh.’ Source: Charm, PD-Author, via Wikimedia Commons. 2010 Jan 7 [cited 2013 Oct 9]. Available from:  http://commons.wikimedia.org/wiki/File:Pencil-db.jpg
  7. ‘Kirk.’ Source: NBC Television, Public Domain (see Citation No. 3 above), via Wikimedia Commons. 1966 Jul 10 [cited 2013 Oct 9]. Available from: http://commons.wikimedia.org/wiki/File:1966_Original_Press_Photo_William_Shatner_as_Captain_Kirk_in_Star_Trek_B4_Show.jpg
  8. ‘Keep more money in your pocket by choosing the right broker for your trading style!’ Source: Mike Schmid, CC-BY-SA-2.0, via Flickr. 2009 Feb 5 [cited 2013 Oct 9]. Available from: http://www.flickr.com/photos/mikeschmid/236216358/
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