Brokerage Fees, ETFs and Managed Funds

Average completion time: ~15 minutes

In this article, you will learn:

Lesson 5: Brokerage Fees, ETFs and Managed Funds

How do brokerage commissions and fund management costs affect my investment returns? 

In the United States, by law, individuals must go through a FINRA registered stock broker to buy and sell stocks. This is important because stock brokers act as intermediaries between investors and stock exchanges, making sure orders are executed in a matter of seconds while still complying with the various securities and trading laws as set forth by SEC.

However, there are brokerage commissions associated with trading through a broker. Retail brokers, who work for individual investors, usually charge around $6 to $10 per online trade, with other associated fees and commissions for anything other than basic stock trades. Trades over the phone or through full service brokers, who also provide advice, can easily top $50 to $100 per trade. Therefore, online brokers make much more sense than full service brokers for educated investors.

Managed funds, including mutual funds, which manage investor's money and promise superior investment returns, require hefty management fees which average around 1.3% to 1.5% of invested funds per year.

These fees may sound small, but through the effect of compounding returns, these commissions and fees quickly eat into your long term investment returns. Let's say you invest $10,000 over a 40 year investing timeline and achieve investment returns of 10% a year over that period. Below is a chart comparing the value of this investment at the end of those 40 years with zero costs, 1% costs and 2% costs. With zero costs, our invested wealth rises to $452,593, compared to $314,094 after 1% costs, and just $217,245 after 2% costs. By minimizing costs, it is possible to nearly double investment returns after compounding, which is a staggering result.

Obviously, trading costs are an inescapable part of investing your money in any sort of asset -- real estate agents, who are in the business of brokering real estate transactions, regularly take a 6% to 7% cut of the sell price of homes, and compared to those kinds of fees, stock brokerage costs almost seem cheap. What's important to know is that these brokerage costs are real and knowing how to minimize these costs is a necessary and valuable skill.

What are ETFs and how are they a good low-cost alternative to traditional managed funds?

Exchange Trade Funds (ETFs) are managed funds that, unlike traditional mutual funds, are listed on stock exchanges, so they trade exactly like stocks on the stock market. They offer a number of large advantages over traditional mutual funds. Firstly, they never have minimum investment amounts, unlike mutual funds which often come with minimum investments of anywhere between $1,000 and $25,000. Unlike traditional mutual funds, ETFs can be bought and sold on the stock market at any time, so investors always have access to their invested funds if they need it. Finally and most importantly, ETFs are usually a lower cost option than mutual funds. The lowest cost index ETFs, which simply match the performance of stock indices like the S&P 500, charge fees of as low as 0.06% per year. There are simply no traditional mutual funds with costs this low, and low trading costs are crucial to investing success. Therefore, if you are interested in buying into funds that invest in specific industries or aim at matching specific markets, ETFs are a convenient and cheap solution. ETFs can be purchased just like ordinary stocks through stock brokers.

How should I choose a stock brokerage?

Thankfully, the stock brokerage industry in the United States is highly competitive and shopping around for the best deal on brokerage can yield huge savings and superior products. Here are a few guidelines for stock investing success when choosing a stock broker:
  • Rule One - Know what you don't need
The most expensive brokerage fees are charged by full-service brokers, who provide help and advice over the phone or in person for investors looking for an easy investing option. However, these brokers charge commissions of upwards of $50 to $100 a trade, and are also incentivized to get you to trade even when it may not be in your best interests. It is also important to realize that while a broker's advice is grounded in stock research, it is still just an opinion. Therefore, while full service brokers can be helpful at first for beginning investors, they soon become a very expensive luxury that can significantly reduce your investment returns.

It is far better to learn the basics of stock investing early on and save yourself hundreds of thousands of dollars in commissions and fees in the long run. Discount online brokers provide self-directed stock research services and fast, easy trade executions, and are a far more convenient and cost-effective option for stock broking.

While different brokers offer a large variety of stock research, news and investment tools, none of these are especially important at first. It is better to find a low cost broker with good technical customer support and a clean, clear stock broking interface. Most importantly, you should be willing to try different brokers who offer low trading costs to see whether or not they meet your investing needs.

  • Rule Two - Minimize your trading costs and maximize your investment returns
Low brokerage costs should still be the most important factor in choosing a stock broker. Spend time looking through the broker's website and agreements. Looking closely at the different fees and costs associated with trading stocks at your broker is absolutely crucial to your investing success.

  • Rule Three - Try stock investing cost-free with up to $100 Free Starting Capital
By reading through these lessons, you've already demonstrated that you're interested in taking control of your own financial future and long term success. Through these lessons, we've hopefully explained clearly the importance of understanding the terminology around stock investing, doing the stock research and not letting brokers and other interested parties undermine your investing success through high fees and commissions.

By completing and passing the final quiz associated with these lessons, you're therefore entitled to up to $100 free starting capital at the SIPC insured stock broker of your choice, where you can kick-start your stock investing. All our special offer brokers are also cost-effective online brokers with low commissions to help you minimize your trading costs. This process is a convenient way to begin stock investing with a reliable and cost-effective stock broker that we've worked with to provide this great special offer exclusively for WealthLift members.
Most importantly, taking control of your investments is absolutely crucial to your financial success. Putting your savings to work and compounding your investment returns over time is the only way to make sure your wealth grows strongly over time and is there for you when you need it.

Your first step to big profits is to having a great, low cost online brokerage. I personally use Ally Invest and they are AWESOME! They offer low prices and great support with the best online trading platform.

Unfortunately Ally Invest is US only. TradeStation is the best online brokerage for Traders outside US.

How to choose a stock broker