How Brokerage Fees Work

Investing costs money. However, it's just more than the initial capital that you put up. Most people don't think beyond their initial investment or purchase price and completely forget about the fees involved. These fees are commonly known in the financial industry as brokerage fees. Here's a brief guide to how brokerage fees work with different types of firms.

What Are Brokerage Fees?

Brokerage fees are any commissions or fees that your broker charges you. Also called broker fees, they are generally charged if you buy or sell shares and other investments, or complete any negotiations or delivery orders. Some brokerages also charge fees for consultations.

Brokerage fees are commonly charged as a flat fee or as a percentage of the transaction executed. In some cases, they may be a hybrid of both of these types. Keep in mind that the fees may vary according to the type of industry and the broker involved. It's always a good idea to ask so you know what to expect to be out of pocket before you complete any transactions.

Types of Brokerage Fees

Not all fees come packaged under the same umbrella. You may see the following under your brokerage contract or regular statements:

• Annual Fees: These are charges that investors may incur on an annual basis for maintaining their brokerage accounts. Annual fees can cover administrative costs associated with account maintenance, access to trading platforms, and customer support services.
• Research Fees: Some brokerage firms offer research and analysis tools to help investors make informed trading decisions. Research fees may apply for access to premium research reports, investment data, market analysis, and other research-related services provided by the brokerage firm.
• Inactivity Fees: If investors do not execute trades or maintain a minimum level of activity within their accounts over a specified period, they may be subject to inactivity fees. These fees are designed to incentivize regular trading activity and cover the costs of maintaining inactive accounts.
• Fund Fees: Investors who invest in mutual funds or ETFs may incur fund fees, which are expenses associated with managing and operating these investment funds. Fund fees typically include management fees, administrative expenses, and other operational costs.
• Account Fees: These fees cover various administrative and service-related expenses associated with maintaining a brokerage account. Account fees may include charges for account opening, closing, transferring funds, or other account-related transactions.
• Assets Under Management (AUM) Fees: Some brokerage firms or investment advisors charge fees based on the total value of assets under management. AUM fees are typically calculated as a percentage of the investor's total assets and are charged periodically, such as monthly or annually. These fees are common in wealth management services and advisory accounts.

Factors That Influence Brokerage Fees

There's several key items that may have an impact on what brokerage fees are charged. Generally speaking, the more critical ones are listed below, though this list is not meant to be exhaustive of all factors.

Type of Asset

Different types of financial assets may have distinct fee structures associated with them. For example, many brokerage firms charge a commission fee for buying or selling stocks. This fee can be a fixed amount per trade or a percentage of the trade value. In forex trading, brokers typically earn revenue through spreads (the differences between the buying and selling prices of currency pairs). Meanwhile, trading options and futures contracts may involve different fee structures such as per-contract fees.

Trading Volume

Some brokerage firms offer volume-based discounts to clients where the commission per trade decreases as the trading volume increases. This incentivizes high-volume traders to execute more trades and can result in cost savings for active investors. Volume-based discounts may be tiered, with different commission rates applying to different levels of trading volume.

Brokerage Firm

Different brokerage firms have varying fee structures and levels of service. This means that brokerage fees will vary based on their business models, target customer segments, and the range of services offered. We'll talk more about the two main types of firms later in this article: full-service brokerage firms and discount brokerage firms.

Trading Platform

Last, fees can also vary based on the trading platform used by investors. Advanced trading platforms with sophisticated features, advanced charting tools, and real-time market data may come with higher fees or subscription costs. Note that when choosing a brokerage firm, some firms offer proprietary trading platforms to their clients. This may be a factor that, because the firm needs to recover costs to maintain that software, results in higher brokerage fees.

Full-Service Broker Fees

Full-service brokers are paid commissions. These fees are based on the transactions they execute for their clients. At a full-service broker, you pay a premium for research, education, and advice. It’s important to remember that full-service brokers are also salespeople.

Full service brokers may charge their fees in a variety of ways. For example, as mentioned above, they can charge per transaction (i.e. $x per transaction). They can also charge annual fees of x% based on the value of the portfolio. Note that those figures will vary widely between firms; if you're interested in this option, you'd be best suited to contact local firms in your region that can cater to your specific needs to get relevant pricing quotes.

Full-service brokers will also have an incentive to perform well because if your portfolio's assets under management increase, this means that they make more for managing them. If you're interested in the full-service broker space, Investopedia has a list of the best full-service brokers.

Discount Broker Fees

Discount brokers became popular with the rise of the internet. Most brokers that fall into this category operate through online portals, allowing you to trade easily with the click of a button.

The majority of discount brokers generally do not offer investment advice. This means that fees tend to be much less than traditional full-service brokers. Trading fees for online discount brokers range anywhere from $4.95 to $20, but most are between $7 and $10. This rate is subject to change since discount brokers are consistently lowering their fees in order to attract more customers and gain market share. Some even offer free trades.

If you do your homework, discount brokers can save you a lot of money when it comes to transaction costs. For those interested in the discount broker space, Investopedia has a list of the best discount brokers.

Do Your Own Research

Most investors don’t bother reading Securities and Exchange Commission (SEC) filings, but SEC filings are available to the public, and the information within them is like taking an open book test. The answers are provided for you. Unlike press releases, a public company must state the facts in its SEC filings. This makes it relatively easy to research stocks. 

Do your research to determine the best options that fit your own personal investment style. This means that you shouldn't jump on the bandwagon just because a trend is hot or simply because the market is moving one way. You have to make sure that any moves you make align with your goals.

As a general rule, revenue growth is the key factor driving stock price appreciation if the broader market is hot. Investors and traders love revenue growth in bull market environments. But if the broader market is cold, net income growth and a strong balance sheet are likely to be the keys to success. Investors and traders like to run to safety for dividends and share buybacks in these environments. But again, make sure whatever moves you make reflect your style.

The Bottom Line

The financial industry has gone through significant changes thanks to the internet. This includes the way we trade. There was a time when your only options were to go to a full-service broker. Now, there are so many options from which financially-savvy investors can choose if they want to trade on their own—and often, at a cheaper rate. If you do decide to work with a broker, be mindful of their fees and when those fees may be charged.