The 4 Most Important Things About Brokerage Fees

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Brokerage fees aren't created equal. Here are the fees that really matter, and when they matter.Image source: Getty Images.

Shopping around for a brokerage account is like putting together a jigsaw puzzle. The goal is to find a good fit for you -- a broker that offers a commission and fee schedule that fits your investing style -- as the best broker for one investor could easily be the absolute worst broker for another.

Below, I'll guide you through four things that you should know when trying to decide between all the different brokers out there.

1. Stock commissions don't matter much (for 99% of investors)

Traders may get a lot of attention, but the truth is that most investors aren't very active, placing only the infrequent trade to buy or sell a stock or fund.

Consider this: TD Ameritrade is arguably designed for active trading thanks to its free trading platform with a number of bells and whistles, but publicly-available data suggests its average account placed fewer than 19 trades last year. Of course, that's an average, and all averages skew high. It's safe to say most of its clients placed fewer trades than that.

The reality is that most online discount brokers price their services within a very narrow band. The best discount brokers charge $4.95 per trade to $6.95 per trade, excluding volume discounts that may make trading prices even lower. As a result, for the person who makes just 10 stock or ETF trades per year, a group that includes a large portion of individual investors, the difference between the most expensive and least expensive broker adds up to just $20 in commissions, relative chump change.

For this reason, your time is better spent looking at features, freebies, and other fees where there are bigger differences between brokers. Commissions for stock and ETFs are a very visible fee all potential clients know about, so all discount brokers are very competitive on these most basic commission prices.

2. Mutual fund commissions can matter…a lot

Commissions on stock or ETF trades might not differ much from broker to broker, but transaction fees on mutual funds can vary wildly. Most brokers have a host of mutual funds you can invest in without paying a transaction charge. However, if you want to buy a fund that isn't on a broker's no-transaction-fee list, you can expect to pay dearly in transaction costs at many of the largest brokerage firms.

For example, Charles Schwab offers a long list of mutual funds you can buy without paying a load or transaction fee, many of which have industry-leading $0 minimums. If you want to go beyond its list, though, it will cost you, since it charges a $76 fee to buy a fund that it doesn't offer for free. That may make it impractical for investors who just need an account to consolidate their mutual fund holdings.

In contrast, Ally Invest doesn't have many no-transaction-fee mutual funds, but it does have one of the lowest fees to buy no-load mutual funds through its service, charging just $9.95 per trade. For the purpose of having an account that can act as a "container" for a mutual fund portfolio, Ally Invest is hard to beat.

3. Commission-free ETFs aren't always the best deal

Most major brokerages now offer a long list of exchange-traded funds (ETFs) you can buy or sell without paying a commission. But if ETFs are what you want, be sure to shop around carefully. Many commission-free ETFs carry higher expense ratios, meaning you'll save a small amount (less than $7) in commissions by purchasing them, but pay higher annual fees every year thereafter.

To illustrate what I mean, consider an example where a commission-free ETF carries an expense ratio of 0.75% per year and a similar ETF carries an expense ratio of 0.10% with a commission of $7 to buy and sell. Below are the up-front and annual costs of investing $10,000 into these example funds.

ETF Expense ratio Commissions paid Annual ETF fees
Commission-free ETF 0.75% $0 $75
Ordinary ETF 0.10% $14 ($7 to buy and eventually sell) $10

Data source: Author's example.

In this specific case, the commission-free ETF is no real bargain for a long-term investor, since they'll save no more than $14 in commissions, but incur substantially higher on-going annual management fees that quickly exceed the commission savings.

This isn't to say that all commission-free ETFs are a bad deal. In fact, I'd argue that commission-free ETFs can be one of the best deals out there if you're willing to do some digging.

Here are some notable bargains in the ETF category:

  • Charles Schwab -- With one of the largest commission-free ETF selections out there, Schwab has a lineup of its own incredibly inexpensive index ETFs, many of which carry expense ratios of 0.05% or less.

  • E*TRADE -- This broker's big perk is that it offers a "barbell" value proposition, catering to active traders and long-term investors at the same time. Notably, it offers a number of low-cost Vanguard ETFs on its commission-free list, which are widely regarded as the "gold standard" for low-cost ETF investing.

  • Fidelity -- This discount broker puts up a compelling value proposition for long-term investors, given it offers 240 different iShares ETFs that investors can buy or sell for free. Investors could easily make a highly-diversified, low-cost portfolio just from its commission-free ETF offerings. iShares is the undisputed leader in ETFs, no question about it, so getting its ETFs for free is quite the perk.

If you want a brokerage account just for the purposes of occasionally putting money into a portfolio of low-cost ETFs, any comparison shopper will almost certainly land at one of the three brokers above.

4. Special deals make a big difference

Most brokers have perks for people who open a new account or transfer their brokerage account from another institution. In general, having a bigger balance can typically net you a larger bonus for opening an account, typically in the form of free trades, though some also offer a cash bonus that is added to your account.

One intriguing deal comes from Merrill Edge, which gives customers 30 free stock and ETF trades every month when they qualify as a Preferred Rewards Platinum customer. In short, if you have a combined balance of $50,000 or more in a qualifying Bank of America, Merrill Edge, or Merrill Lynch account, you meet that threshold and can qualify for 30 free trades per month. Having a balance in excess of $100,000 qualifies you for 100 free trades per month.

Even though Merrill Edge might not have the best commission prices at $6.95 per trade (many others start at $4.95), or have any commission-free ETFs, clients who have larger balances can effectively make all the trades they would ever need to make and pay nothing at all in commissions to do it.

For an investor who has just $5,000 to start, Merrill Edge may get looked over. An investor who has $50,000 or more, however, may see it as an absolute bargain.

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We pored over the data and user reviews to find the select rare picks that landed a spot on our list of the best stock brokers. Some of these best-in-class picks pack in valuable perks, including $0 stock and ETF commissions. Get started and review our best stock brokers.

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