3 Ways You Are Overpaying For Your Brokerage Account
Your Higher Fees Are Paying For Advertising
If you currently have an account with one of the brand name broker like E-trade, Schawb or TD Ameritrade, you could be saving money by choosing to open an account with a discount stockbroker. According to a study conducted by NerdWallet, 17 million investors are overpaying for their online brokerage services. Only 12% of the fees paid to brand name brokerage firms actually go to pay for trade execution while the rest goes to pay for overhead expenses like advertising and operational expenses.
Most investors believe that by paying for a brand name brokerage account they are in fact receiving better trade execution. However, many brokerage firms outsource the trade execution to third party services like Citadel and Citigroup, as do discount online brokerage firms. So this means instead of paying $9.99 per trade, you could be paying $4.95 or less for the same execution.
Consider Speed vs. Price
If you’re an investor for whom shaving a 0.70 second delay in execution speed is not important factor, you may be overpaying for your account. Brokerage firms like TD Ameritrade and E-Trade that offer execution speed of .20 seconds at the price of $9.99 per trade, could be a good option for pattern day traders to whom execution quality matters, but for the majority of accountholders, lighting fast execution is not critical. In that case you could use a brokerage firm like Interactive Brokers, which charges $1 per trade at the speed of .90 seconds.
You Have the Power to Negotiate Your Fees
You may not know that if you are an active trader and make at least 10 trades a month and hold $50,000 in your brokerage account, you hold the power to negotiate your fees with your broker. Try asking if you can have your account fees, trading platform fees or margin rates adjusted to better fit your needs.
So What Should You Do?
Does this mean you should switch accounts right now? No – it just means there are cheaper options worth considering. However you should also be sure to check all the additional services you are currently using in your account to make sure that if you switch to a cheaper broker, you are still receiving the same overall service that you require. If you do decide to switch brokers, be prepared to pay transfer fees on your account. However, most transfer fees range between $50-$100, so keep in mind that even saving $5 on your trade would make up a $100 transfer fee after 20 trades.
By Neda Jafarzadeh, a financial analyst with NerdWallet Investing. NerdWallet Investing helps investors compare total costs to find the best online broker.