Financial Advice for Retirement, Social Security, IRAs and Estate Planning

How To Beat The Broker Fee Increases

Last update on: Oct 17 2017
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You need to find the broker most suitable for you. Most brokers are reacting to the bear market by imposing higher fees on some investors. Each broker is seeking a particular type of client instead of trying to please the whole market. Find the broker that wants your type, and the fee increases won’t chip away at your profits.

Charles Schwab & Co., which saw clients’ trading volume decline 50% from the peak two years ago, is the latest to increase fees on a dozen services. Most services that require human interaction cost more. Even closing an account now costs $60 instead of being free. The cost of using a broker to trade rises to a minimum of $54.95 from $39. The cost of an automated telephone trade will rise to $49.95, an increase from $29.95. The cost of an online trade remains $29.95 plus a $3 handling fee. Schwab clearly wants users of technology as clients.

TD Waterhouse increased fees in two stages over the last year. Most other brokers also recently increased various fees. Many fee increases are to discourage small accounts and inactive accounts. Muriel Siebert is almost alone in not raising fees. There also are disguised fee increases. Some brokers, such as Merrill Lynch, no longer automatically sweep idle cash into money market funds each day. That means less interest income for investors and more for the brokers.

The recent increases essentially complete Schwab’s transition from the original discount broker to a hybrid between a full service broker and a discount broker. Schwab joins higher-than-discount costs with additional services, such as web-based research and the availability of more types of investments. Fidelity Brokerage takes the same approach, charging the highest fees among mutual fund and discount brokers but offering perhaps the best technology and other options. Vanguard Brokerage also is something of a hybrid, but it leans more towards being a discounter. It has lower fees in most cases than either Schwab or Fidelity, but it does not offer as many features and services as the other two.

Most of my subscribers can avoid the higher fees without much change in their activities.

Many of my recommended funds are available for no transaction fee at most of the brokers. For the ones that aren’t, I periodically publish my list of recommended no transaction fee funds for each investment category. You can avoid fees by selecting an NTF fund instead of my top choice fund when you invest through Schwab and most other discount brokers. Plus, you’ll get all the other services of the broker.

Vanguard offers the same approach. You can invest primarily in the ultra low-cost Vanguard funds using my recommended list. You also can use the little-advertised Vanguard Brokerage to buy non-Vanguard funds. The standard trading fee for mutual funds through Vanguard is a flat $35, and many of my recommended funds are available through Vanguard for no transaction fee.

My no transaction fee and Vanguard recommended funds were last updated in the January 2002 issue and are available on the web site archive under Portfolio Watch.

Investors who have not consolidated at a broker or who are unhappy with the fee increases have several options.

The first step is to list the features of a broker that are most important to you. Some want the lowest cost and are indifferent to the extras. Others want an office nearby, convenient free research, a wide range of available investments, an easy to use web site, or other features.

After determining your priorities, narrow the list of available brokers. An easy way to survey the field and narrow your choices is through a rating service. One way is through my survey in the February 2002 issue. Another is to use the popular and useful service www.gomez.com. The service rates the discount brokers (and other financial service sectors) twice a year.

The top funds in the overall rankings at gomez.com tend to be the same each time. Schwab, Fidelity, E*Trade, CSFB Direct, and TD Waterhouse usually are the top five. This is so, whether you want a broker ranked by overall features, ease of use, consumer confidence, Internet resources, or relationship services.  None of those brokers, however, is low cost. The ratings change only when cost is made the priority. Then, the top brokers are Financial Café (recently merged into BrokerageAmerica), Empire, Scottrade, Firstrade, and Ameritrade. Of these, only Ameritrade and Scottrade score well on the other factors and are the only low-cost brokers you should consider.

Before choosing a low-cost broker, read the fine print. Prominently advertised low rates don’t apply to all investors. There are account maintenance fees for accounts below minimum values or with low trading levels, and fees are charged for various services that are included at other brokers. You might pay extra to receive paper trade confirmations, be issued a check, or to reinvest dividends.

The lowest-cost brokers primarily seek frequent stock traders. Their costs tend to rise for infrequent traders and mutual fund investors. BrokerageAmerica, for example, charges a flat $15 for each mutual fund trade. It doesn’t offer any no-transaction fee funds. At Schwab and Vanguard, on the other hand, you’ll pay higher fees if you trade no transaction fee funds too frequently. You have to hold a fund for one year at Vanguard to avoid the trading fees.

There are other ways to reduce costs. For example, you should consider getting family members to consolidate accounts at the same broker. Brokers generally will combine related accounts when considering minimum account values and trading volume.

One of my long time recommendations to readers is to simplify their financial lives. By consolidating your investments at one broker, your financial life will be simplified. You will have a better handle on your investments, reduce costs, and make better investment decisions. With the brokers increasing fees and changing services, this is a good time to re-evaluate your choice. Take a fresh look at the options and choose the consolidator that best fits your needs.

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