The way you pay your broker depends on the type of account you have and the type of investments you make. You can ask for summary of the charges that might apply. For example, in transaction-based accounts, you pay a commission or sales charge when you buy or sell. In an asset-based account, you pay an annual fee based on the value of your account.
Paying commissions
If you pay commissions, you generally are charged a percentage of the purchase or sale price for each transaction. The rate can vary significantly from one firm to another, and even within a firm. If you trade frequently, for example, you could pay at a lower rate than a client who buys and sells only once or twice a year.
In some cases, firms may charge a flat rate for a trade up to 1,000 shares of stock or comparable quantities of other products. If the rate is low, you could end up paying very little for your transactions. That’s often the case if you trade frequently. But the opposite may be true as well, especially if the fee is high and you are managing your portfolio by selling off holdings with little market value.
You may also find that commission-based firms charge lower rates for orders you give online than they do for phone orders or other broker-assisted trades.
The price you pay could also depend upon the kind of account you open and the kinds of orders you place. Some products have different commission structures, too.
Asset-based fees
In contrast, some firms charge an annual asset-based fee for their services. In that case, the fee may cover the cost of all of your transactions or you may pay a substantially reduced commission on trades over a predetermined number. That structure may make fee-based accounts best suited to investors who trade frequently and whose commission payments might exceed the annual fee. Conversely, a fee-based approach could be more costly for a buy-and-hold investor with a sizeable portfolio.
Fee-based brokers often provide a greater level of investment advice and planning than commission-based brokers do — though that’s not a hard-and-fast rule. You’ll want to include that possibility when you weigh which approach seems to make the most sense for you. You may find that if you are more comfortable paying one way rather than the other that your choice of firms is dictated by that decision.
Commissions on trades aren’t the only costs associated with brokerage accounts. Some firms charge an annual maintenance fee, and some charge a fee if the value of your account dips below a certain level. If you have an IRA,
there may be a custodial fee,
though it may be waived if your account balance reaches a
certain level. Transfer fees may apply if you want to move your account
to another firm. It’s a good idea to review the information each firm provides on its fee structure when considering your choices.
