Guide to Brokerage Fees
Updated
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It is certainly cheaper to be an investor than it was a few decades ago. It used to be quite common to pay hundreds of dollars in trading commissions per transaction when buying stocks, ETFs, and other investments, but now investors pay a fraction of this, and sometimes nothing at all.
While the brokerage fee structure has been disrupted in recent years, that doesn't mean investing is completely free. Here's a quick guide to the various fees you may have to pay your broker for investments and related services.
A brokerage fee is a charge in exchange for completing a transaction or for ongoing management of one's investments. The most well-known type of brokerage fee is a trading commission, but there are several other types of fees charged by brokers for various investment services (more on these below).
Brokerage fees are typically calculated as a flat rate per trade. A mutual fund commission, for example, is typically the same whether you're investing $5,000 or $500,000. However, some commissions are percentage-based, such as robo-advisor management fees. Cryptocurrency trading commissions often have a percentage-based component as well.
Other types of commissions are a flat rate per item traded. Options trading fees are in this category, as most brokers charge a small fee (usually in the $0.50 to $1.00 range) for every contract traded.
Fees can vary significantly between brokers. Virtually all have eliminated commissions on online stock trading, but there can be major differences elsewhere. For example, options trading typically costs between $0.50 and $1 per contract, but there are some brokers that don't charge anything. Mutual fund commissions are a similar situation and can range from free to more than $50 per trade.
The point is that there's no good answer to the question of "how much are brokerage fees?" It depends on which broker you use and what types of investments you make. For example, a mutual fund investor might find a broker's $39.99 mutual fund commission to be high, but someone who does not (and doesn't plan to) invest in mutual funds doesn't need to pay any attention to this as long as the other fees are acceptable.
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Until about five years ago, trading commissions were a much larger factor. But it's still important to take costs into consideration. For example, a 1% annual management fee on an actively managed mutual fund might not sound excessive, but it could cost you thousands of dollars (or much more) in returns over a period of decades.
To illustrate this, consider this example. Let's say that you invest $20,000 into mutual funds that produce average returns of 10% per year over the long run. Here's how your account would grow without any fees compared with a 1% annual management fee:
| Time period | Investment with no fees | Investment with 1% management fee |
|---|---|---|
| 5 years | $40,263 | $38,466 |
| 10 years | $64,844 | $59,184 |
| 20 years | $168,188 | $140,110 |
| 30 years | $436,235 | $331,692 |
| 40 years | $1,131,481 | $785,236 |
This is certainly a simplified example, but it does a great job of illustrating just how costly those seemingly small investment fees can be over time. In this case, a 1% management fee would have cost you more than $346,000 in returns over a period of four decades!
Commissions are the best-known type of brokerage fee you might encounter, but they certainly aren't the only cost of investing you should keep in mind. Here are some of the charges a broker may have.
Virtually all brokers have eliminated commissions for online stock trades, but there are still investment commissions to keep in mind. For example, while online stock trades are free, most brokers still charge for trades made by phone with the broker's assistance or for stocks that trade on the over the counter (OTC) markets. Many have commissions for options and cryptocurrencies, and most have mutual fund commissions for funds that aren't on a no-transaction-fee (NTF) list.
Some brokers -- especially those that are designed with frequent traders in mind -- charge an inactivity fee if your account remains idle for too long.
Some brokers offer subscriptions to investing publications, third party research tools, and even trading apps that you'll have to pay a monthly or annual subscription fee to use.
If you invest in a mutual fund or ETF, it will almost certainly have management fees, and these are known as the fund's expense ratio. An expense ratio is the percentage of your assets that go towards fees each year. It isn't a direct cost (it is simply reflected in the fund's performance), but it is important to realize that mutual fund and ETF investing isn't free.
Some brokers charge an additional (usually small) fee for retirement accounts like IRAs, known as a custodial fee.
If you have a professional investment manager selecting stocks and ETFs for your portfolio, you'll probably have to pay for the privilege. The standard management fee tends to be 0.80%-1.0% of assets under management annually for a human financial advisor, while a robo-advisor that automatically allocates your money tends to charge around 0.20%-0.50%.
Brokers often charge fees for certain services and activities that may or may not apply to you. These may include wire transfer fees, insufficient fund fees for check deposits, fees for transferring investments to an external account, a fee for requesting a paper statement or trade confirmation, and fees for trading foreign stocks, just to name a few.
To be sure, finding a broker that meets your needs and is a great fit for the types of investments and trading behavior you use is more important than finding the cheapest option. But with that in mind, the best way to keep brokerage fees to a minimum is to shop around. Our top brokers list is a good place to start, and once you've narrowed down the list to two or three that best meet your needs, compare their pricing.
One smart move is to thoroughly read a broker's pricing structure before opening an account. You can typically find it through the broker's home page or by running an internet search for "'NAME OF BROKER' pricing." This can be a smart way to compare two or more brokerages you're interested in -- especially if their commission structure is identical.
All major brokers that we cover have eliminated commissions on online stock trading, but there are some that charge fees for trading options, mutual funds, and cryptocurrencies. Some brokers are focused on eliminating fees; Robinhood, SoFi, and Webull are a few popular examples where most trades are completely free.
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In many cases, brokerage fees can be well worth it. For example, a robo-advisor can create a custom investment portfolio for a fee of 0.25%-0.40% per year, which is significantly less than you'll pay to a human advisor. However, it's important to shop around because different brokers have very different pricing structures.
Brokerage firms are businesses that intend to earn a profit from facilitating investments, and fees are a big component of how they do it. Having said that, there has been a movement to disrupt the traditional brokerage pricing models, so some brokers have fee structures that are much lower than have traditionally existed.
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