This article is brought to you by LearningMarkets.com.
Brokers compete fiercely for online business. Besides products and service, they will try to differentiate themselves within the industry by offering the lowest commissions.It would seem that a straightforward comparison of broker commissions would easily show what brokers are truly leading the low-commission war; however, that is not the case.
This article will discuss the reasons why comparison is difficult and what commission rates you should be paying the most attention to.
Don’t Trust Broker Commission Comparison Tables
Most online broker Web sites have a commission comparison table somewhere within their marketing information. Invariably, the major brokers will show themselves as the low-cost leader compared with their competitors.
Disclosing commissions accurately is a regulatory requirement, so how can all brokers show themselves as the cost leader and still be telling the truth?
Brokers charge different commission rates for each kind of trade. Buying 100 shares of stock costs a different amount than buying 1,000 shares, or a mutual fund, or a bond or an option … you get the idea.
There is an extremely large number of possible trade combinations that will all cost a different amount in commissions. Most brokers can find some combination of trades in which they are the low-cost leader. This combination of trades may look good, but probably does not reflect the way you trade. (Learn 7 Reasons You Need a Broker Who Specializes in Options.)
For example, the lowest cost for trading 100 shares of stock we found in a survey of the major online brokers was $7 per trade, and the highest commission for the same trade was $15. However, if you needed to talk to a broker to execute your trade, the low-cost leader would charge you $27, while the higher commission broker would talk to you for free.
The commissions for mutual funds and options were also more expensive with the “low-cost” leader. This additional information could easily tip the balance depending on what kind of investor you are.
The bottom line for these comparison tables is that they are highly footnoted, biased and don’t reflect your needs as an individual. The best course of action is to completely ignore them the same way you would toss a piece of junk mail.
How to Pick the Broker With the Lowest Commissions
On the bright side, we feel that there is a logical way to evaluate a broker’s commission schedule in a meaningful way, but it requires a little effort on your part.
1. Evaluate and record your typical trading needs and size.
Create a list of the types of trades you execute (or would like to execute), the typical size of those trades, and your trading frequency. Call the brokers you are evaluating and ask each of them to quote to you how much they will charge in commissions based on your list of typical trades. They want your business, so make them work for it.
Evaluate broker commissions based on your own behavior rather than on a piece of advertising.
2. Ask for lower rates or other concessions.
Keep in mind that most brokers are showing you their advertised rates. They may be willing to discount their rates for you, and will frequently match the rates you want from another broker to get your business.
The point is that you won’t get what you don’t ask for, and this may allow you to match the commissions you want with the broker that has the tools, products and service you prefer.
3. What are the other fees?
Brokers publish commissions and fees in long disclosures. These are boring and are too general to be very useful. Now that you have a quote for the commissions that relate to you specifically, you are more prepared to find out what other fees will be charged against your account.
Some of the fees you should look out for include inactivity fees, monthly or quarterly minimums, transfer fees, margin costs and the fees associated with calling a broker on the phone.
As an individual investors, you can’t control the market or your returns. This makes it absolutely critical to maximize your control where you can. Trading costs are a key area to evaluate when choosing a broker, and once you know what to look for it really isn’t all that difficult.
A little effort on the phone can save you many potential losses.
