If you have a brokerage account with one of the three largest online brokers like E-trade, Schwab or TD Ameritrade, you may be paying more money for your trade account than necessary. The following are five things your popular online broker isn’t telling you about the service that you are receiving:
1. “When It Comes to Security, We’re All The Same.”
When it comes to online trading – or any money management matter – the most important thing is trust. That’s why every online brokerage is required to register with the SEC (Securities Exchange Commission). In addition, all U.S. brokerages are required to hold membership with FINRA (Financial Industry Regulatory Authority) and the SIPC (Securities Investor Protection Corporation). FINRA monitors brokerage firms to prevent federal trading violations, and the SIPC insures investors in case a brokerage firm fails – much like the FDIC does for banks. While service may vary by broker, they’re all subject to the same regulations. So keep this in mind if you find that you could be paying less money by opening an account with a discount broker but have been scared that it won’t be as trustworthy as your popular online broker.
2. “Paying More Doesn’t Translate to Better Service”
Higher commissions don’t necessarily equal better service. Better-known and more expensive services like Scottrade and TD Ameritrade use the same third party execution services as the deep discounters like Cobra Trading. NerdWallet found that deep discounter like Interactive Brokers which charges a $1 per trade, also delivered the greatest average price improvement and they actually handle the trade execution directly without using a third party service.
3. “You’re Not Get Real-Time Information”
When traders see a stock price online, many naturally assume the quote displayed is current. But this is not always true. Many brokers charge exorbitant fees for real-time information, while others don’t offer it at all. If you currently use Trade Station or MB Trading, you may be paying hundreds extra per year to just to have real-time information. Other popular sites like Citi and Vanguard don’t even offer this service.
4. “You’re Required to Pay An Annual Fee”
While it’s common knowledge that brokers charge commission fees for trading, many account holders forget that they may also be required to pay annual fees on their accounts. In some cases, this means you’ll be charged a fee whether you use the account or not. Annual or inactivity fees should be listed on your agreement, so be sure to read the fine print.
5. “You’re Paying for More Advertising, Not Additional Service”
The three most popular online brokers – TD Ameritrade, E-trade, and Schwab – spend 88% of your commission fees on non-trading-related expenses. Only 12% of their fees are spent on the trade execution, and that’s roughly the same amount as they spend on ads. In contrast, discount brokers spend 59% of their earned fees on the trade execution.
Kimberly J Howard, CFP® – www.kjhfinancialservices.com
By Neda Jafarzadeh, a financial analyst with NerdWallet Investing, which helps investors compare total costs to find the best brokerage firm for their needs.