Are You Still Paying Too Much for Your Broker?

Before you go, we thought you'd like these...
Broker investments
Alamy
Just a few decades ago, anyone who wanted to invest in the stock market had to swallow the idea that buying a stock -- any stock -- would probably cost them a few hundred dollars. But in recent years, the "commissions" brokers charge for placing stock trades have dropped precipitously.

These days, it's not uncommon to find discount brokers urging you to set up an account with them for $10 a trade, because those guys across the street are charging $20 or $30, and that's just too much to pay.

My, how times have changed.

The More Things Change, the More They Don't

But could it be that paying even $10 has now become "too much"? It almost seems ungrateful to ask whether a stock trade that's already fallen 90 percent in price should actually be 99 percent cheaper. And yet, over at financial website NerdWallet, that's exactly what they're asking.

You see, up on Wall Street, hedge funds and other high-frequency trading firms pay millions of dollars a year to rent office space close to computer servers at the New York Stock Exchange and Nasdaq. Even with stock trades traveling at the speed of light, it takes a few milliseconds for a trade order to go from trader to exchange. By locating their computers a few feet closer to the exchange's servers, a high-frequency trader hopes to get its automated, computerized stock trades "executed" a microsecond or two faster than the other guy.

Down here on Main Street, though, a recent poll of investors conducted by NerdWallet found that most people balk at the idea of paying even a dollar more in commissions for faster trade execution. By a margin of 6-to-1, investors assured NerdWallet that they couldn't care less whether a trade order executes at 12:01:01 p.m. or 12:01:02. In the grand scheme of things, a second's delay just isn't that big of a deal.

Chart
NerdWallet


And yet, according to NerdWallet, although the majority of online investors say that they prefer to invest with an online broker that imposes few "fees" and charges low prices on stock trades, barely 1 investor in 10 actually patronizes such brokers.

Most of us are paying for that extra second of fast trade execution ... and we don't even know it.

The Difference Between Day Traders and Regular People

How is it that we're paying for lightning-fast trade executions that we don't even need? Did anyone even ask us if we wanted to upgrade to that service?

No, they didn't ask. That's because most discount brokerages today were actually set up back in the '90s, when stocks were believed to only ever go up, never down, and when "day trading" was all the rage.

As a result, discount brokerages such as Charles Schwab (SCHW), E-Trade Financial (ETFC), and TD Ameritrade (AMTD) cut their teeth on the assumption that everyone wanted fast trade execution -- and they've built this assumption into their product offerings and their pricing.

And yet, if ultra-fast trade execution isn't important to most people anymore -- and isn't important to you -- it's entirely possible you are actually paying too much for a service you don't really want.

Investigating this possibility, NerdWallet has crunched the numbers, and examined everything from the speed at which a broker executes trades to their ability to offer "price improvement" (getting you a better price for a stock than you actually offered to buy or sell it for) to the firms they use to actually, logistically, place the trades they receive from clients.

NerdWallet's conclusion: Oftentimes, firms with names such as TradeKing, CobraTrading and Interactive Brokers (IBKR) -- most of which most of us have never heard of before -- are able to give investors all the services they really want from an online broker, and charge anywhere from $5 to as little as $1 for it.

Brand Names and Brokers

Maybe the name-brand "discount brokers" aren't giving such great discounts anymore, relative to the new breed of "deep discount brokers." Still, there's something in a name.

Consider: When shopping the grocery aisles, we gravitate toward trusted brands like Heinz and Clorox rather than unfamiliar labels and store-brand items. Similarly, investors seeking a discount broker may find themselves swayed by a catchy commercial advertisement, a brand name with a "good reputation," or failing that, at least a kind word of advice from a friend.
Sponsored Links


Problem is, that kind of automatic defaulting to what seems safe and familiar can cost you. Obvious example: Placing a plain-vanilla limit order to buy a stock with one broker can cost as little as $7 ... or as much as $30.

But it goes beyond that. Some brokerages -- Bank of America's (BAC) Merrill Lynch being a prime example, will allow you to trade stocks for free on their website if you have a sufficiently large account with them. Others -- such as Wells Fargo (WFC) -- offer sizable discounts to customers with fat bank accounts. Still others, such as TD Ameritrade, can be negotiated with to obtain discounted or even free trading access.

When you add up all the possibilities, it's entirely possible that an investor who trades stocks, say, 10 times a month, could easily end up paying $3,600 more than he or she needs to simply by picking a "popular" broker instead of seeking out the best deal.

What It Means to You

Again, when you get right down to it, most brokerages today offer a pretty fantastic deal to investors relative to what we were raised to expect a broker to charge 30 or 40 years ago. And yes, when you're buying $1,000 or $10,000 worth of stock in a single trade, paying $10 or so for the privilege probably doesn't seem like much.

Even so, times change, and investors need to change with them. If this latest change means that many of us are now paying twice (or more) the going rate for simple, effective trading of stock, it's worth looking into.

It mostly comes down to the size of your account, the number of trades you place in a month, and whether you want to trade such esoteric items as futures and currency in addition to stocks.

Those are the exact questions NerdWallet asks you to input in its Compare Brokers tool. It then compares 67 brokers in its database to pop out an organized list of those that offer the best deals tailored to how you intend to invest.

Motley Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool recommends the stocks of Interactive Brokers, TD Ameritrade, and Wells Fargo. The Motley Fool owns shares of Bank of America and Wells Fargo.

Are You Still Paying Too Much for Your Broker?

Risk level: High

What do success stories like Henry Ford, Steve Jobs and Mark Zuckerberg have in common? They all made their mark (and their millions) by coming up with a better idea and running with it. Starting a business is a proven path to wealth, and the best way to get there is to start small and scale up -- which usually means being bought out by a larger company, selling franchises or licensing your product.

An ambitious goal is critical if you want to expand your business, says Barbara Findlay Schenck, a small-business strategist and author of Selling Your Business for Dummies.

Before you apply for loans or sign up investors, polish your business plan. And don't overlook sources of free help. For example, you could tap your alma mater's alumni network for potential mentors. You can also get advice from more than 13,000 small-business volunteers through Score, a nonprofit organization supported by the Small Business Administration. (For more, see Six Steps to Starting Your Own Business.)

Risk level: Medium

Creating a product and licensing it or selling it through retailers is another route to making money from your good idea.

One of the biggest mistakes that aspiring inventors make is to create a product before they've determined whether there's a demand for it, says Sidnee Peck, who teaches classes in entrepreneurship at Arizona State University's W.P. Carey School of Business. She encourages her students to talk to potential customers in person before they develop their products.

Nancy Tedeschi came up with the idea for SnapIt, an eyeglass-repair device, after her mother used an earring to jerry rig her broken glasses. Convinced that she could improve on the tiny tools contained in most eyeglass-repair kits, Tedeschi invented a small screw with a snap-off extension. Tedeschi got the attention of Walmart (WMT), the nation's largest retailer, by entering its "Get on the Shelf" contest, an "American Idol"-like competition for aspiring entrepreneurs. She was one of two runners-up, and her product is now available on Walmart.com.

Online surveys and social media provide an easy way to reach a lot of people, Peck says, "but you don't get to see people's eyes light up." Tedeschi also attended housewares and hardware trade shows, where she introduced her product to representatives of other big retailers. Those contacts helped her get SnapIt on the shelves at Walgreens (WAG) and Ace Hardware.

Risk level: High

You can make a lot of money fixing up run-down houses and selling them for a quick profit, but you need cash to venture into this business. It's tough to get a mortgage for a property you plan to flip, but a home-equity line of credit against your primary home is a good source of funds for first-time flippers. Short-term bridge loans from private lenders, known as hard-money loans, are a higher-risk way to get the cash -- and charge higher interest rates.

Look for ugly ducklings in upscale neighborhoods where the market has picked up. Before buying a property, research recent sale prices for nearby homes to get an idea of what you can make, and find out how long the homes were on the market. Successful flippers usually sell their properties in 30 to 60 days, says Letitia Patterson, a real estate agent who has invested in properties in the Detroit area.

Don't forget to factor in the expenses you'll incur while you're holding the property, along with closing costs. Justin Pierce, a real estate investor who flips properties in the Washington, D.C., suburbs, says he starts by estimating the sale price of a fixed-up home. Once he comes up with that number, he subtracts buying and selling costs (typically 10% to 15%), a profit margin of 15% to 20%, and the cost of repairs. With those numbers in hand, he can determine how much he will offer.

Risk level: Medium

The average interest rate for a 30-year, fixed-rate mortgage on a rental property is only about 4%, according to mortgage Web site LendingTree. That means your monthly rental income should cover the mortgage, which wasn't possible when rates were 7% or higher, says Michael Corbett, an adviser to the real estate Web site Trulia and author of Before You Buy! Plus, the National Association of Realtors projects that average apartment rents will increase 4.6% this year, following a 4.1% increase in 2012.

Once you've purchased your first property, you can use the equity to buy additional properties, typically through a cash-out refinancing, says Doug Lebda, chief executive officer of LendingTree. Most lenders won't let you take out more than 80% of the equity you have in the property.

Fayz Khan, a former auto engineer, ventured into the rental market in 2008 because he believed he could earn better returns in real estate than he could get from the stock market (see "What It Takes to Be a Landlord,"). He now owns eight rental properties in the Baltimore area, and the return on his investment has far exceeded his initial expectations. Khan and his business partners are exploring opportunities in North Dakota, where the oil boom has led to an acute housing shortage.

Risk level: Low

You don't need talent or money to cash in on YouTube. In fact, all you need is a camera, something unique to share and plenty of luck. "A lot of people make over six figures a year on YouTube," says Ross Ching, a commercial and music video director.

A good one-off viral video is under three minutes and it gets you hooked within the first ten seconds. But it's tough to be a one-hit wonder. A more reasonable goal for amateur filmmakers is to score viral fame with a YouTube channel. That means making a series of videos, each of which can run a little longer than three minutes. Try highlighting a specific skill or theme -- say, cooking or standup comedy. Your videos will drive traffic to one another while you perfect your craft and earn "subscribers."

Reach out to media outlets and bloggers with a link to your video. Don't expect your audience to find your video without some direction. A link-back on a popular site can skyrocket views.

You can earn cash with YouTube advertisements, which can run about $2 per 1,000 views. But the real money is in endorsements and product sales. Industry experts estimate that Korean pop star Psy earned about $8 million in 2012 from his addictive YouTube music video "Gangnam Style." As his video accumulates views, his single racks up iTunes downloads and he picks up lucrative contracts, such as his pistachio-promoting Super Bowl commercial.

Risk level: High

If you can withstand 12-hour workdays on an oil rig in the North Sea or maintain your composure during military coups, you may be rewarded with free housing, a six-figure salary and the chance to see the world.

According to Rigzone, an oil and gas industry data provider, entry-level workers on a rig earn more than $68,000, on average; the pay ratchets up dramatically as you gain experience, which is easy to do in an industry that believes heavily in on-the-job training, says Rigzone president Paul Caplan. Drilling positions are most lucrative, with an average salary of $126,471.

If physical labor isn't your thing, you could get a gig with the State Department. The harsher the environment, the better the incentives: Foreign Service jobs add up to 70% of base salary for certain field positions in Iraq and Afghanistan.

A bonus: Hardship posts in a remote locale afford few opportunities to spend -- so there's not much to do with your money but watch it grow.

of
SEE ALL
BACK TO SLIDE
SHOW CAPTION +
HIDE CAPTION
Read Full Story

People are Reading

The Latest from our Partners
1 - 3 of 15