Are You Still Paying Too Much for Your Broker?

×
Broker investments
Alamy
Just a few decades ago, anyone who wanted to invest in the stock market had to swallow the idea that buying a stock -- any stock -- would probably cost them a few hundred dollars. But in recent years, the "commissions" brokers charge for placing stock trades have dropped precipitously.

These days, it's not uncommon to find discount brokers urging you to set up an account with them for $10 a trade, because those guys across the street are charging $20 or $30, and that's just too much to pay.

My, how times have changed.

The More Things Change, the More They Don't

But could it be that paying even $10 has now become "too much"? It almost seems ungrateful to ask whether a stock trade that's already fallen 90 percent in price should actually be 99 percent cheaper. And yet, over at financial website NerdWallet, that's exactly what they're asking.

You see, up on Wall Street, hedge funds and other high-frequency trading firms pay millions of dollars a year to rent office space close to computer servers at the New York Stock Exchange and Nasdaq. Even with stock trades traveling at the speed of light, it takes a few milliseconds for a trade order to go from trader to exchange. By locating their computers a few feet closer to the exchange's servers, a high-frequency trader hopes to get its automated, computerized stock trades "executed" a microsecond or two faster than the other guy.

Down here on Main Street, though, a recent poll of investors conducted by NerdWallet found that most people balk at the idea of paying even a dollar more in commissions for faster trade execution. By a margin of 6-to-1, investors assured NerdWallet that they couldn't care less whether a trade order executes at 12:01:01 p.m. or 12:01:02. In the grand scheme of things, a second's delay just isn't that big of a deal.

Chart
NerdWallet


And yet, according to NerdWallet, although the majority of online investors say that they prefer to invest with an online broker that imposes few "fees" and charges low prices on stock trades, barely 1 investor in 10 actually patronizes such brokers.

Most of us are paying for that extra second of fast trade execution ... and we don't even know it.

The Difference Between Day Traders and Regular People

How is it that we're paying for lightning-fast trade executions that we don't even need? Did anyone even ask us if we wanted to upgrade to that service?

No, they didn't ask. That's because most discount brokerages today were actually set up back in the '90s, when stocks were believed to only ever go up, never down, and when "day trading" was all the rage.

As a result, discount brokerages such as Charles Schwab (SCHW), E-Trade Financial (ETFC), and TD Ameritrade (AMTD) cut their teeth on the assumption that everyone wanted fast trade execution -- and they've built this assumption into their product offerings and their pricing.

And yet, if ultra-fast trade execution isn't important to most people anymore -- and isn't important to you -- it's entirely possible you are actually paying too much for a service you don't really want.

Investigating this possibility, NerdWallet has crunched the numbers, and examined everything from the speed at which a broker executes trades to their ability to offer "price improvement" (getting you a better price for a stock than you actually offered to buy or sell it for) to the firms they use to actually, logistically, place the trades they receive from clients.

NerdWallet's conclusion: Oftentimes, firms with names such as TradeKing, CobraTrading and Interactive Brokers (IBKR) -- most of which most of us have never heard of before -- are able to give investors all the services they really want from an online broker, and charge anywhere from $5 to as little as $1 for it.

Brand Names and Brokers

Maybe the name-brand "discount brokers" aren't giving such great discounts anymore, relative to the new breed of "deep discount brokers." Still, there's something in a name.

Consider: When shopping the grocery aisles, we gravitate toward trusted brands like Heinz and Clorox rather than unfamiliar labels and store-brand items. Similarly, investors seeking a discount broker may find themselves swayed by a catchy commercial advertisement, a brand name with a "good reputation," or failing that, at least a kind word of advice from a friend.


Problem is, that kind of automatic defaulting to what seems safe and familiar can cost you. Obvious example: Placing a plain-vanilla limit order to buy a stock with one broker can cost as little as $7 ... or as much as $30.

But it goes beyond that. Some brokerages -- Bank of America's (BAC) Merrill Lynch being a prime example, will allow you to trade stocks for free on their website if you have a sufficiently large account with them. Others -- such as Wells Fargo (WFC) -- offer sizable discounts to customers with fat bank accounts. Still others, such as TD Ameritrade, can be negotiated with to obtain discounted or even free trading access.

When you add up all the possibilities, it's entirely possible that an investor who trades stocks, say, 10 times a month, could easily end up paying $3,600 more than he or she needs to simply by picking a "popular" broker instead of seeking out the best deal.

What It Means to You

Again, when you get right down to it, most brokerages today offer a pretty fantastic deal to investors relative to what we were raised to expect a broker to charge 30 or 40 years ago. And yes, when you're buying $1,000 or $10,000 worth of stock in a single trade, paying $10 or so for the privilege probably doesn't seem like much.

Even so, times change, and investors need to change with them. If this latest change means that many of us are now paying twice (or more) the going rate for simple, effective trading of stock, it's worth looking into.

It mostly comes down to the size of your account, the number of trades you place in a month, and whether you want to trade such esoteric items as futures and currency in addition to stocks.

Those are the exact questions NerdWallet asks you to input in its Compare Brokers tool. It then compares 67 brokers in its database to pop out an organized list of those that offer the best deals tailored to how you intend to invest.

Motley Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool recommends the stocks of Interactive Brokers, TD Ameritrade, and Wells Fargo. The Motley Fool owns shares of Bank of America and Wells Fargo.


Increase your money and finance knowledge from home

What Is Your Risk Tolerance?

Answer the question "What type of investor am I?".

View Course »

Investor’s Toolbox

Improve your investing savvy with the right financial toolset.

View Course »

Add a Comment

*0 / 3000 Character Maximum