When you want to make money from your investments, you want people on your side who will put your needs first. Increasingly, though, those who make their own investing decisions have discovered that sometimes the professionals they rely on to make trades don't always have their best interests at heart.
One recent study confirmed an idea many investors have had all along: that fees are the most important thing about being a smart investor. Too often, financial companies charge fees that don't make sense. When that happens, customers feel ripped off -- and those companies can lose business.
Brokers that treat you right
Late last month, J.D. Power and Associates released its annual U.S. Self-Directed Investor Satisfaction Study. The study serves as a benchmark for brokerage companies to compare themselves against their peers on factors related to overall customer satisfaction, including types of accounts offered, research resources, interaction between broker staff and customers, and trading charges and fees.
The results may surprise some investors, because the overall winner was a company known more for its mutual funds: USAA. Yet the company's brokerage arm got an overall score of 831 and top ratings on all but one category, beating runners-up Scottrade and Charles Schwab
Meanwhile, E*TRADE
Why fees matter
More interesting than the absolute results were J.D. Power's comments on changes from last year. In particular, the study found that satisfaction about fees and other trading charges fell by fully 30 points from 2010 to 2011. Only 36% of investors said they completely understood the fees their brokers charge -- and remember, these are self-directed investors who are used to digging up the details on their own.
Some of the problem comes from the proliferation of esoteric fees. In addition to normal costs like commissions, you have to be on the lookout for fees on everything from low balances and lack of activity to research services and account maintenance. Although you'll find all of those fees on a fee schedule buried somewhere in the fine print of the account agreements you get when you set up an account, that's not transparent enough for most investors.
Arguably, the ironic thing about hard-to-understand fee structures is that if brokers were clearer about the value they try to add by making certain types of services available, then investors might be more willing to pay them. For instance, Vanguard charges a $20 fee to some investors with small account balances, but it explains that the fee helps make up for the small amount that these investors pay in regular annual expenses. Vanguard makes it clear that not to charge a fee would be unfair to those with larger balances, who would in effect be subsidizing those small accounts. That explanation itself makes some investors more willing to pay the fee -- and for those who don't, all you have to do is accept receiving statements electronically.
In contrast, brokers that hide their fees send a clear message that they aren't willing to defend their fee practices openly. Regardless of a broker's actual reasons for doing so, customers see it as an attempt to pull a fast one on them -- and that's never a good attitude to foster in your customers.
Get comfortable
Your relationship with your broker is one of the most important ones you'll have in your investing life. The right broker can make a huge difference to your investment results, while the wrong one will not only hold you back from reaching your full potential but also create resentment that could sabotage your entire investing plan.
If you don't have the perfect relationship with your broker, it's time to find a better one. Click here and review some great choices in our Broker Center.
