It’s difficult to identify the right online broker to work with, and the process of selecting the best one for your needs can be hard to navigate. How do you decide where to take your money? Should you go with the broker who claims the best customer service, the one who offers the most asset classes, or the one with the fastest trade execution? Plus, fees are buried in various pages of companies’ websites, and it can be nearly impossible to figure out which ones apply to you.
If you still think finding the right online brokerage account is a cinch, you're probably not paying enough attention to all the fees adding up over time. When it comes to picking an online brokerage account, we all know that investors should always research their options upfront and read the small print. But this process is easier said than done, so NerdWallet’s brokerage comparison tool helps you do it by allowing you to compare all the costs and fees at the 74 brokerage accounts available to website.
To get you started, NerdWallet investigated the services offered by the largest popular online brokerages in the U.S.—and learned the following surprising facts we think every investor should know about.
1. Investors Are Wasting $1.8 Billion in Unnecessary Investing Fees. Many investors are overpaying their brokers because they don’t know about all the discount brokerage accounts available to them.
A new NerdWallet study found that more than 17 million retail investors with the three largest online brokerages (Schwab, E-trade, and TD Ameritrade) are throwing away over $1.8 billion every year in unnecessary fees. These brokerages charge $7.99 to $9.99 a trade in addition to other fees, compared with per-trade fees in the $1 range at discount brokers.
NerdWallet investigated major brokerages’ official financial statements to find that these major brokerages aren’t spending investors’ commission in a way that directly benefits them. The three largest online brokers—Schwab, E-trade, and TD Ameritrade—spend 88 percent of their commission fees on non-execution expenses. Meanwhile, 11 percent is spent on advertising and a whole 24 percent goes to legal and other indirect operating expenses. In contrast, the discount brokerages Interactive Brokers and Speed Trader spent an average of 59 percent on trade execution, with just 7 percent going to advertising and general expenses.
2. You Can Get Top Notch Services for a Better Price Elsewhere. The high commission and fees found at the three largest brokerages raise the question: Is this extra cost justified?
Not usually. For the most part, for the services most investors need on a regular basis, NerdWallet found they could be trading far more affordably with a discount brokerage. The trade execution analysis found that consumers could be getting equally reliable trade execution elsewhere, at a discount brokerage, for a fraction of the cost and practically the same speed. Many popular online brokers use the same execution service as the cheaper deep-discount brokers. For example, TD Ameritrade and Scottrade use Knight, Citadel, and Citigroup for execution services. Meanwhile, the deep discount brokerages TradeKing and Cobra Trading also use these same execution services.
Need extra research and analysis goodies to inform your trade decisions? Even for the more involved investors who rely heavily upon research reports, real time data, and analysis software, these extra materials are available in various forms at more than 30 brokerage companies offering research reports, real-time data, and analysis software. Twenty-four of these 30 even offer them at lower prices than the most popular brokers.
3. Switching Brokerages Pays For Itself In Just Months. Already have a brokerage account, or maybe several? If you want to change accounts or wish you’d made the switch earlier, it’s never too late or too tough to switch brokers. Though one of the most cumbersome fees you’ll encounter in the trading process is the ACAT fee, or the transfer fee you face if you choose to take your money elsewhere, it really can pay off in just a few months.
For example, TD Ameritrade charges $9.99 per trade and has an account transfer fee of $75. Meanwhile, TradeKing weighs in at $4.95 per trade. If you make even just one trade per month, for instance, you’ll be saving money in 15 months. Meanwhile, switching to a deep-discount broker like Venom Trading ($1 per trade) can save you money in less than 9 months.
Look Beyond the Brand Names. Just as you would if you were trying to save money in the grocery aisle or department store, shop around for affordable alternatives that don’t sacrifice quality. Taking the time to compare brokerage costs and consider lesser-known alternatives could save you boatloads. Investors can use NerdWallet’s free brokerage comparison tool to compare total costs and determine the best fit for their unique investing needs.
Susan Lyon is a strategy analyst for NerdWallet Investing, a financial literacy website dedicated to empowering consumers to make better financial decisions in a variety of money matters.