Fees, Fees, Everywhere a Fee – How much does your brokerage account really cost?
By Cathy DeWitt Dunn
How Much is Your Wall Street Brokerage Account Costing You? Calculating the Real Cost of Fees
When it comes to investing, you cannot control stock market ups and downs, and you can’t control what fees brokerage firms charge you.
But, you can control where you invest your funds. Not all Wall Street firms are created equal––and you can rest assured that many charge fees designed to nickel-and-dime you to death. If you voice your concerns over fees, they may claim the fees are necessary to provide you with better service, but that isn’t necessarily the case––many brokerages charge very affordable fees while providing quality service. There is also an alternative to brokerage accounts that provides relief from fees, while also helping your nest egg grow…but more about that later.
Breaking Down Fees: Which are Reasonable and Which Aren’t?
So, now that the stage is set, let’s look at some of the more “unreasonable” fee structures you might encounter. With this information, you’ll have the knowledge to really dig deep to decide whether your brokerage account is actually costing you money.
- Inactivity fees: Brokerages make their money when you trade. Some charge you if you don’t make enough trades during a set time frame. In any case, it’s a silly and unnecessary fee you shouldn’t have to pay.
- Account maintenance fees: These fees are put on certain services, such as when you request historical data, have your records maintained, or get statements mailed to you. The idea is to discourage you from making such requests.
- Minimum equity retirement fees: You can get charged for not maintaining a certain minimum balance with some brokerage services.
- Transfer fees: To pour salt in the wound, some brokerage firms may charge you fees for leaving! If you grow unhappy with your service, you’re unable to make a clean get-away without reaching into your pocket to pay yet more fees.
- Trading fees: Most brokerages charge you a fee for each trade they make on your behalf. It’s a reasonable fee – after all, they are performing a valuable service for you. However, some firms charge $20 – $30 for the exact same service that costs $3 – $8 at others. Others will charge you a percentage of the total cost of the transaction, which significantly eats away at your long-term returns.
- Percentage-based portfolio management fees: If you’re paying a brokerage to actively manage your investments, they may charge a percentage of the value of the entire portfolio, usually somewhere in the range of 1 – 2%. This may be okay if you are making money. Unfortunately, you still pay this fee if your account decreases in value.
- Flat-fee portfolio management: These fees can be more reasonable than percentage-based fees because they incentivize responsible decision-making. On a percentage basis, your broker is incented to take risks to grow your portfolio so they can make a better commission. On a flat-fee basis, the broker is incented to simply do their best job of managing the portfolio – otherwise you’ll leave for another broker.
Fees Can Cost You Dearly
All fees are definitely disclosed in the main paperwork when you initially open a brokerage account, but they’re sometimes not made abundantly clear. What’s worse is that they can significantly damage the value of your portfolio.
Let’s say, for example, that your brokerage ends up charging you $200 in fees per year. It doesn’t seem like the end of the world, but you don’t have the full picture yet.
Remember, any money that’s going to fees could instead be invested. Let’s say that your portfolio grows at a rate of 10% year with the value of your portfolio compounding over time. So, if you pay $200 in fees per year, this is how much you could have made if that $200 grew at 10% instead:
- 40 years at 10% growth: $9,051.85
- 30 years at 10% growth: $3,489.88
- 20 years at 10% growth: $1,345.50
- 10 years at 10% growth: $518.75
When we double the amount of fees to $400, you can see compounding in further depth:
- 40 years at 10% growth: $18,103.70
- 30 years at 10% growth: $6,979.76
- 20 years at 10% growth: $2,691.00
- 10 years at 10% growth: $1,037.50
You can clearly see that even though you pay “only” $200 or $400 in annual fees, you pay dearly in the long run.
Now, let’s take a look at a final example. Say you “only” pay a 1.0% management fee to a brokerage for them to manage your portfolio. Say you give the firm everything you have saved up to this point – $100,000. So, your annual fee will be $1,000 for them to manage your portfolio. Here’s how much that $1,000 costs you over the life of your investments:
- 40 years at 10% growth: $45,259.26
- 30 years at 10% growth: $17,449.40
- 20 years at 10% growth: $6,727.50
- 10 years at 10% growth: $2,593.74
Whew! 1% isn’t really that cheap at all. And remember, you’ll have to pay that fee every year. Perhaps now you can see why all these various fees, even though they may seem minor, really add up.
An Option for Escaping Brokerage Fees
If you are tired of brokerage fees––and the roller coaster risks of the stock market––consider a Fixed Index Annuity instead.
Fixed index annuities can help you make money in good and bad markets. Plus, your principal is 100% protected––so you’ll never have to worry about losing a chunk of your retirement savings in a market downturn. And, unless you choose an optional rider, fixed index annuities have no fees whatsoever, which can make them a much less expensive option than brokerage accounts.
While controlling fees is important, the fixed index annuity story is so much more than just escaping expensive brokerage accounts. To learn more about key differences between Wall Street and fixed index annuities, we invite you to watch our free on-demand webinar. You’ll see that when it comes to retirement income, gambling on Wall Street (while paying those fees!) doesn’t always pay.