Online Broker Nuisance Fees
Read all the fees before signing up
One of the biggest pitfalls when signing up with an online broker is not carefully reviewing all the fees a brokerage can assess to your accounts. Consumers tend to be overly focused on the commission fees for stock trades, and brokerage house advertisements place that aspect of their service front and center in their advertising.
However, there are so many other fees a brokerage can nail you with if you don't conduct your due diligence. That's why it's essential to spend a lot of time perusing a brokerage's website so that you aren't hit with some unwelcome surprises. Here are the most common overlooked fees:
Brokerages want to encourage active trading because they generate commission fees for each trade. So they'll hit your account with fees if you don't trade at all, or trade below a certain volume. If you are a buy-and-hold investor, and your brokerage assesses a monthly inactivity fee, you could find your returns significantly impacted as those fees add up.
There are two types of fees that often get assessed in this category. The first is a fee assessed if you close your account. The reason is to discourage you from switching to another broker, particularly one that doesn't assess monthly inactivity fees, as IRA accounts tend to be more buy-and-hold driven (since they don’t get liquidated until retirement). The second fee is a custodial fee. Although most brokers will waive this fee if your account maintains a zero balance, the fee is designed to work hand-in-hand with the fee for closing accounts. If it's a choice between a custodial fee and staying where you are and a closing fee to move, you'll pay to stay to avoid the hassle of moving.
Much like the IRA closing fee, the fee is designed to discourage you from switching to a competitor. Indeed, if you've discovered a boatload of hidden fees at your new broker and you want to bail, they'll do what they can to discourage it. However, because other brokers are keen to have your business, many new promotions are offering to reimburse you for transfer fees. For example, if you open a Firstrade online broker account, they will reimburse you up to $100 in transfer fees if you transfer an account of $25,000 or more to them.
This fee often gets assessed if you aren't an active trader and you don't carry large balances (greater than $50,000 or thereabouts). Again, the online broker's bread-and-butter are stock commission trading fees. If you aren't trading a lot, then the brokerage isn't making as much as they want out of you. So they designed this fee to be a lot like the IRA Custodial Fee -- they get you whether you stay or leave, but it's easier to stay and pay.
Picking the Right Broker
Avoiding the Pitfalls!
The biggest pitfalls when looking for a brokerage
Scour each broker's website!
Online brokers do not make it easy to find all the hidden fees.
I recommend: Click on every single header on each broker's website and follow every link to make sure you don't miss any fee disclosures.
Create a hidden fee spreadsheet
As you peruse each website, take note of every single fee charged and for what purpose. Create a spreadsheet so you can compare side-by-side
I recommend: Toss out any candidate that charges a fee for just about everything. They are clearly only interested in nickel-and-diming you.
Some useful advice about fees.
- Resign yourself to the fact that you will be charged some kind of fee for something you don't think is deserving of one.
- Negotiate with the broker to lower or waive as many fees as possible, particularly if you are moving more than $100,000 into their accounts. If you don't ask, you don't get.