Investing in the stock market is usually alluring for those trying to grow their money. But there are many things to consider before jumping in — chief among them stockbroker commissions. Stockbrokers often charge commissions and other fees for the use of their services, and these brokerage fees can vary widely.
Investors must pay attention to average brokerage fees when making investment decisions; finding the right broker can play a significant role in long-term financial outcomes. Before delving into how much stockbrokers typically charge for their services, it’s worth understanding their role in an individual’s investment strategy.
What Does a Stockbroker Do?
A stockbroker, or investment broker, is an individual or firm that charges a fee or commission to buy or sell stocks and other securities on behalf of their clients. Using a stockbroker is relatively common for people looking to invest in the market.
Buying stocks isn’t like making other purchases because the channels through which stocks are bought and sold are fairly controlled. While an individual buying a computer could choose to purchase directly from a manufacturer, a store, or a friend, the channels for buying stocks are much more limited. Generally, purchases of stock are required to flow through a stockbroker.
A stockbroker has a license that allows them to trade registered securities, meaning the ability to buy and sell stocks on behalf of clients. But merely acting as an agent for buying and selling stocks doesn’t capture the full extent of what some brokers do. Many brokers offer additional services to clients, like money management and estate planning.
Because the types of services a stockbroker may offer, and the fees they levy on these services, can vary, it’s good to understand the main categories of brokers. In addition to selling shares of companies, a stockbroker may also sell other traded securities such as mutual funds and exchange-traded funds.
What Is the Average Stock Broker Commission Fee?
The amount charged by a brokerage firm for its services can vary greatly. Some firms may charge a flat fee for their services, while others may charge a percentage of the overall value of the transaction. The average fee charged by brokerage firms is typically between 1% and 2% of the total transaction value.
Full-Service vs Discount Stockbrokers
The main two categories of stockbrokers are full-service brokers and discount brokers. You want to understand the differences before opening a brokerage account.
As they sound, a full-service brokerage firm provides more hands-on service, helping clients balance their portfolios and providing other investment advice. Discount brokers allow an investor to buy and sell stock and other assets, but provide few add-ons but still. Commission rates and additional fees vary accordingly.
Because full-service stockbrokers provide an array of services over the year, they typically base their commissions on a more all-inclusive model determined by the value of the investments they manage. While there may also be additional fees, the typical commission structure for a full-service broker is known as the percentage of assets under management. The cost is charged annually and is listed within fee schedules as “x%/AUM” (assets under management).
Discount brokers, synonymous with online brokerage accounts, on the other hand, typically charge a per-transaction flat stock trade fee, regardless of the type of stock or number of shares being bought or sold.
For example, if the stock trade fee is $5 per trade, that’s what an individual would pay whether they were buying five shares of a stock valued at $50 a share ($250) or 500 shares ($25,000).
However, many discount brokers these days charge no commission for trading stocks.
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Common Brokerage Fees
Various investment fees and costs are associated with the buying and selling of investments. Investors should consider these brokerage fees when choosing a broker and deciding what investments to make.
An investment’s management fee is the fee the investment manager charges for its services. This fee is typically a percentage of the investment’s assets under management and is deducted from the investment’s returns.
If you use a full-service brokerage that offers money management services, they will often charge a management fee. Some charge as much as 2% and others far less.
Generally speaking, the more money you have invested with a broker or money manager, the lower your management fee will be.
Commission For Trading
Many brokerage firms charge a commission for making trades on behalf of clients. Fees and commissions vary widely depending on the type of transaction and broker. Those fees can be based on a percentage of the transaction’s value — usually between 1% to 2% — or they can be a flat fee.
The commissions for trading depend on whether an investor uses a full-service or discount broker. Because full-service brokers offer a wide range of advice and services, their commissions per trade may be higher than a discount or online brokerage might charge.
Discount brokers offer fewer advice and services, so they can charge a lower flat fee per trade, from less than $5 to more than $30. In recent years, the biggest online brokerage firms have offered no commission trading, partly due to competition and because they instead get paid through a practice known as payment for order flow.
Retirement Account Fees: 401(k)
If you have a 401(k) savings account through your employer, there are several fees to keep in mind when making your investments.
First, you’ll likely be charged an administration fee to maintain the plan. These fees can range from 0.5% to 2% of your 401(k) balance. The 401(k) provider charges this fee to your employer, and the cost is usually passed down to the employees.
Additionally, the actual investments in your 401(k), like mutual funds and ETFs, charge management fees that you’ll have to pay.
Mutual Fund Fees
Investors interested in buying and selling mutual funds must consider the fees associated with these investment vehicles.
The expense ratio is the yearly cost that mutual funds and ETFs charge investors to cover operating costs. The expense ratio measures the total costs as a percentage of the fund’s total assets. The fund’s costs may include management, custodial, marketing, and other expenses.
The average expense ratio for an actively managed mutual fund ranges from 0.5% to 1.0%, while passive funds have an average expense ratio of 0.2%.
The costs of operating the mutual fund are deducted from your investment, reducing your returns each year.
Mutual fund investors may pay sales loads — also known as sales charges — when they buy or sell shares of the fund. The sales load is how the broker or advisor gets paid for their service.
A sales load isn’t a flat transaction fee, however. Instead, it’s a percentage of the assets invested.
FINRA caps mutual fund sales loads at 8.5%, though the common range is between 3% and 6%.
Brokerage Fee Impact on Investments Long-Term
Brokerage and investment fees and commissions can eat away at long-term gains. Thus, finding the right broker and investing in low-cost funds can help you achieve your long-term financial goals.
To illustrate, if full-service brokerage charges a 1.5% annual management fee on a $50,000 portfolio, that costs $750 for the investor during a single year. While that charge doesn’t seem significant for one year, those fees will add up and eat into overall returns over time.
Brokerage Fee Pros
One of the benefits of using a brokerage is that you have access to valuable resources, research, and advice. These services may help you make better investment decisions, leading to better financial outcomes. So, you may get what you pay for, even if you think the fees may be steep.
Brokerage Fee Cons
As noted above, brokerage fees can be expensive and eat into investment returns. This is especially a problem if you don’t do your homework and pay attention to all the fees charged by brokers and the kind of investments you make.
Additionally, high brokerage fees may discourage some people from investing, leading to poor long-term financial outcomes.
Is It Worth Using a Stockbroker?
Using a stockbroker, especially a full-service brokerage, can be ideal for investors intimidated by complicated financial markets. The idea of having a licensed professional guide novice investors through every investment decision and trade might seem like a good way to get more comfortable with the principles of investing. But as the above examples illustrate, the average full-service stockbroker commission can make the full-service approach expensive.
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With long-term returns that have historically outpaced interest rates on savings, investing in the stock market can be a powerful strategy for financial growth. Even beginners may find investing less intimidating than they thought — and possibly see clear of high stockbroker fees.
With a SoFi Invest® online brokerage account, you can start trading stocks and ETFs with no commissions for as little as $5. If you sign up for a SoFi account, you’ll even get complimentary access to financial planners, SoFi’s non-commissioned fiduciaries who are required to keep your best interests in mind.
How do stock brokerage fees work?
Stock brokerage fees are typically a commission that a broker charges for executing trades on behalf of their clients. These fees can vary depending on the type of trade being executed, as well as the broker’s commission structure.
Are there any alternatives to a brokerage fee?
A brokerage fee is a charge assessed by a broker for their services, which typically include advice, transaction execution, and asset management. There are a variety of alternatives to brokerage fees, including flat fees, subscription fees, and performance-based fees.
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