How Much Does a Brokerage Take From Commission?
Uncover the true costs of using a brokerage. Understand various charges, beyond commissions, and learn strategies to minimize your investment expenses.
Investors using brokerage firms face costs beyond their initial investment. While “zero commission” trading has changed the fee landscape, understanding how brokerages generate revenue and charge clients is crucial for assessing the true cost of investing. These charges can significantly influence overall investment returns.
Understanding Commission Structures
A commission is a fee paid to a broker or brokerage firm for facilitating the buying and selling of securities on behalf of clients. Historically, commissions were a primary revenue source for brokerages, charged for nearly every stock trade. Today, the prevalence of “zero commission” trading for stocks and exchange-traded funds (ETFs) means direct trading fees for these common assets are rare. However, commissions still apply to many other investment products and services.
Commissions can be structured in several ways. Per-share commissions involve a fee for each share traded, often with minimum or maximum charges. Flat-fee commissions charge a fixed amount per transaction regardless of trade size, such as $5 per trade. Percentage-based commissions, less common for standard equity trades, charge a percentage of the total transaction value.
While stock and ETF trading often carries no direct commission, other asset classes do. Options trading involves a per-contract fee, ranging from $0.50 to $0.65 per contract, plus any base trade fee. Mutual funds may incur “load fees,” which are sales charges paid to the broker for selling the fund. These can be front-end loads (paid when purchased, up to 5%), back-end loads (paid when sold, decreasing over time), or level loads (an annual fee).
Futures contracts also have commissions, often charged per-side (for buying and selling), with rates as low as $0.10 per side for high-volume traders, plus exchange and clearing fees. Fixed-income investments and over-the-counter (OTC) securities may also be subject to commissions.
Other Brokerage Fees
Beyond direct commissions, other fees contribute to the overall cost of using brokerage services. Account maintenance fees are periodic charges, often annual or quarterly, for holding an account, though many brokerages waive these for accounts above a certain balance or with regular activity. Transfer fees are charged when moving assets into or out of an account, either as a flat fee or a percentage of the transferred amount. Inactivity fees may be imposed if an account does not meet minimum trading activity or asset levels within a specified period, ranging from $10 to $50 per month, though some brokers do not charge these.
Advisory or management fees apply if the brokerage provides managed accounts or financial planning services. These are percentage-based fees on assets under management (AUM), around 1% annually, compensating for professional guidance and portfolio management. Miscellaneous fees include wire transfer fees, physical statement fees for paper mailings, or fees for accessing premium research reports or trading platforms.
Less direct but influential revenue streams for brokerages include Payment for Order Flow (PFOF) and the bid-ask spread. PFOF involves a brokerage receiving compensation from market makers for routing client orders for execution. While not a direct investor charge, critics argue it can create conflicts of interest, affecting trade execution quality.
The bid-ask spread is the difference between the highest price a buyer will pay (bid) and the lowest price a seller will accept (ask). Market makers profit from this spread. Though not a separate fee, it represents an inherent transaction cost impacting the effective price an investor receives or pays for a security. A wider spread means a higher implicit cost.
Assessing and Minimizing Brokerage Costs
Even small brokerage fees can significantly erode investment returns over time. The compounding effect means a minor percentage or flat fee can substantially reduce portfolio value over years or decades. For instance, a 1.5% annual fee could considerably reduce investment growth over a 20-year period.
Investors should proactively locate a brokerage’s fee schedule, available on their website, within account agreements, or in regulatory disclosures. Reviewing these documents helps identify all potential charges. Regular review of account statements also helps monitor applied fees.
Several strategies can help minimize brokerage costs. Choosing a brokerage firm with a fee structure that aligns with one’s trading habits is important; for frequent stock or ETF traders, a “zero commission” platform is advantageous. Consolidating multiple accounts into one can help avoid duplicate account maintenance or inactivity fees. Understanding trade frequency is also important, as excessive trading quickly accumulates transaction costs, especially for assets with per-trade or per-contract commissions.
Utilizing commission-free ETFs or no-load mutual funds can reduce sales charges. Some brokerages offer promotions, such as sign-up bonuses or a set number of commission-free trades, which can provide initial savings. For larger accounts or high-volume traders, it may be possible to negotiate lower fees directly with the brokerage firm.