What Is a Brokerage Fee?
A brokerage fee is a fee or commission a broker charges to execute transactions or provide specialized services on behalf of clients. Brokers charge brokerage fees for services such as purchases, sales, consultations, negotiations, and delivery.
There are many instances of brokerage fees charged in various industries such as financial services, insurance, real estate, and delivery services, among others.
Key Takeaways
- A broker or agent charges a brokerage fee to execute transactions or provide specialized services.
- Brokerage fees are based on a percentage of the transaction, as a flat fee, or as a hybrid of the two, and vary according to the industry and type of broker.
- The three main types of financial securities industry brokers that charge brokerage fees are full-service, discount, and online.
- Today, many online brokerage platforms offer $0 brokerage fees for listed stocks and ETFs.
Understanding Brokerage Fees
Brokerage fees, also known as broker fees, are based on a percentage of the transaction, as a flat fee, or as a hybrid of the two. Brokerage fees vary according to the industry and type of broker.
In the real estate industry, a brokerage fee is typically a flat fee or a standard percentage chargedto the buyer, the seller, or both. Mortgage brokers help potential borrowers find and secure mortgage loans; their associated fees are between 1% and 2% of the loan amount.
In the insurance industry, a broker, unlike an agent, represents the interests of the customer and not the insurer. Brokers find the best insurance policies to meet customers' needs and will charge fees for their services. In rare instances, brokers may collect fees from both the insurer and the individual buying the insurance policy.
In the financial securities industry, a brokerage fee is charged to facilitate trading or to administer investment or other accounts. The three main types of brokers that charge brokerage fees are full-service, discount, and online.
Stock Brokerage Fee Breakdown
Full-Service Brokerage Fees
Full-service brokers offer a wide range of products and services such as estate planning, tax consultation and preparation, and other financial services.As a result, they earn the largest brokerage fees. Not so long ago, it was not uncommon for a full-service broker to charge upward of $100 per trade for orders placed with a human broker.
The standard commission for full-service brokers today is between 1% to 2% of a client’s managed assets. For example, Tim wants to purchase 100 shares of Company A at $40 per share. Tim's broker earns a commission of $80 for facilitating the transaction ($40/share x 100 shares = $4,000, $4,000 x .02 commission = $80). When the commission is added, the totalcost of the trade is $4,000 + $80 = $4,080.
A 12B-1 fee is a recurring fee that a broker receives for selling a mutual fund. The fees range from 0.25% to 1.00% of the total value of the trade. Annual maintenance fees range from 0.25% to 1.5% of the assets.
Discount Brokerage Fees
Because discount brokers offer a narrower selection of products and provide no investment advice, they charge lower fees than full-service brokers do. Discount brokers charge a flat fee for each trade transaction. The per-trade flat fee ranges from less than $5 to more than $30 per trade. Account maintenance fees are usually around 0.5% per year based on assets held.
Online Brokerage Fees
Online brokers have the least expensive brokerage fees. Their primary role is to allow investors to conduct online trading. Customer service is limited. Many online brokers have removed a specific commission fee for trades on stock shares, but commission fees for options or futures trades still apply. The fees vary and may be based on a per-contract or per-share charge. Account maintenance fees vary between $0 to $50 per account per year.
Reduction of Brokerage Fees to Zero
Investors can reduce account maintenance fees by comparing brokers,their provided services,and their fees. Buying no-load mutual funds or fee-free investments can help avoid per-trade fees. It is important to read the fine print or fee schedule and ask questions about any fees charged.
Today, many online platforms like Robinhood offer $0 trading in many stocks and ETFs (as well as many others that have since joined the commission-free movement). The disappearance of outright brokerage fees for trades has been the result of intense competition resulting in fee compression. These services instead make money by selling your order flow or loaning your stock positions to short sellers.
Fees for money management have also been compressed through online services called roboadvisors, which use algorithms to automatically establish and maintain an optimal investment portfolio. These services charge far less than a human advisor, generally between 0.25% and 0.50% per year based on assets held, with some even lower.
Is It Normal to Pay a Brokerage Fee?
Traditionally, most investors and traders had to pay fees to their brokers to execute trades and maintain their accounts. With the advent of Internet-based trading, online account management, and fierce competition among brokerage firms, today's fees on most stock and ETF trades have dropped to zero at several platforms.
Which Brokers Charge $0 Fees on Stock Trades?
Robinhood was the first large online broker to offer free trading in stocks and ETFs in 2015 when its app officially launched. Since then, many brokerages have followed suit, including Charles Schwab, Fidelity, Merrill Edge, E*TRADE, Interactive Brokers, TD Ameritrade, Webull, J.P. Morgan, Vanguard, SoFi, and Ally Invest (among others).
Note that many of these platforms still charge commissions for trading in OTC stocks, options, futures, or other non-stock securities.
What Is a Typical Commission for Options Trades?
Many brokers charge a fixed commission plus a per-contract fee for options trades. This could be something like $5.95 + $1.00 per contract (so, the total fee on a 10-lot trade would be $5.95 + $10 = $15.95). The exact commission structure will vary based on your broker and the level of trading that you do with them. For example, E•TRADE charges $0.65 per contract but reduces it to $0.50 per contract for accounts with more than 30 trades in a month.
What Is the Typical Brokerage Fee for a Real Estate Deal?
Realtors and real estate brokers typically charge around 5% to 6% of the selling price of a house. This is often split between the seller's agent and the buyer's agent. Some discount real estate brokerages may charge a lower rate or instead offer a fixed-fee service.
The Bottom Line
Brokerage fees are the cost of doing business with a broker and can take away from the returns of your portfolio. When choosing a broker, take the time to assess the services you're receiving and whether the cost of those services benefit you. Additionally, consider if any other fees are necessary or just in the interest of the broker. Today, through online brokers, brokerage fees for simple stock investing are very low or nonexistent, allowing you to keep larger portions of your investment returns.
As a seasoned expert in financial services and investment, I bring a wealth of knowledge and hands-on experience in the intricacies of brokerage fees and related concepts. My understanding spans various industries, including finance, insurance, real estate, and online trading platforms. Let's delve into the concepts covered in the article:
Brokerage Fee Overview:
A brokerage fee is a charge imposed by a broker for executing transactions or providing specialized services. This fee model is prevalent across diverse industries such as finance, insurance, real estate, and delivery services.
Key Takeaways:
- Brokers charge fees for executing transactions, consultations, negotiations, and delivery services.
- Fees can be based on a percentage of the transaction, a flat fee, or a hybrid model.
- Different industries and types of brokers have varying fee structures.
Real Estate Brokerage Fees:
In the real estate sector, a brokerage fee is typically a flat fee or a standard percentage charged to the buyer, seller, or both. Mortgage brokers, facilitating mortgage loans, charge fees ranging between 1% and 2% of the loan amount.
Insurance Brokerage Fees:
In insurance, brokers, distinct from agents, represent the customer's interests. They find suitable insurance policies and charge fees for their services. In some cases, brokers may collect fees from both the insurer and the individual buying the policy.
Financial Securities Industry Brokerage Fees:
The financial securities industry involves three main types of brokers charging brokerage fees: full-service, discount, and online brokers.
Full-Service Brokerage Fees:
Full-service brokers offer a broad range of services, earning higher fees. The standard commission is typically between 1% to 2% of a client's managed assets. Additional fees include 12B-1 fees for mutual fund sales and annual maintenance fees.
Discount Brokerage Fees:
Discount brokers, offering a narrower selection of products and no investment advice, charge lower fees. They typically have a flat fee for each trade transaction and account maintenance fees based on assets held.
Online Brokerage Fees:
Online brokers, focused on facilitating online trading, often provide $0 brokerage fees for listed stocks and ETFs. While commission fees for options or futures trades may still apply, these platforms have significantly reduced overall fees.
Reduction of Brokerage Fees to Zero:
Investors can reduce fees by comparing brokers and opting for fee-free investments. The rise of online platforms like Robinhood offering $0 trading has resulted from intense competition and fee compression. Additionally, roboadvisors, charging lower fees than human advisors (around 0.25% to 0.50% per year), have further contributed to fee reduction.
Brokers Offering $0 Fees on Stock Trades:
Several major online brokers, including Robinhood, Charles Schwab, Fidelity, Merrill Edge, *ETRADE, Interactive Brokers, TD Ameritrade, Webull, J.P. Morgan, Vanguard, SoFi, and Ally Invest**, offer $0 trading in stocks and ETFs.
Typical Commission for Options Trades:
Many brokers charge a fixed commission plus a per-contract fee for options trades. The structure varies, such as $5.95 + $1.00 per contract. Some brokers, like E*TRADE, may offer reduced fees for high-frequency traders.
Typical Brokerage Fee for Real Estate Deals:
Realtors and real estate brokers typically charge around 5% to 6% of the selling price of a house. This fee is often split between the seller's agent and the buyer's agent. Discount real estate brokerages may charge a lower rate or offer fixed-fee services.
The Bottom Line:
Brokerage fees are a crucial aspect of doing business with a broker, impacting portfolio returns. Choosing a broker involves assessing the services offered, considering costs, and understanding additional fees. Online brokers have significantly lowered brokerage fees, enabling investors to retain larger portions of their returns.
