Why Does Choosing The Right Broker Plays A Huge Role In The Long Term?
Gurus always make things seem easier than they actually are. Most of us look for the easy way out – that’s just human nature. So, dishonest grifters promote stock trading like it’s an easy road to wealth.
Can you become financially independent flipping stocks? Sure. However, it’s an art & science that can take years to master. And even then, market swings can put even the most steel-stomached trader on edge.
Here’s the point I’m trying to make – in trading, every advantage matters. A handful of mistakes can make the difference between winning and losing. I mean, we’re already competing against trading algorithms that get better every year.
For this reason, you need to choose a low-cost broker that meets your needs. In this post, we’ll cover what you should be on the lookout for when shopping for a broker.
How Much In Fees Does This Broker Charge?
That’s the question you should be asking whenever you check out a stock broker. Now, if you’re new to investing, you might be asking yourself, “What exactly does a stock broker do?”
As you might guess, they trade securities on your behalf, so you don’t have to. But, they do much more than that. They also provide advice on specific stocks, and the effect that current events may have on them.
In return for their services, they charge fees. Commissions on trades are the most common form of remuneration that they earn. However, they also charge fees on the assets that their clients accumulate.
The latter charge, if too high, can act like a parachute on your back, holding you back from wealth. Let’s take a look at the shocking math below.
Compound Interest Makes Management Fees Work Against You
At first glance, an annual fee of 1% on portfolio value doesn’t sound like a lot. But, as the size of your nest egg increases, losses from this charge snowballs dramatically.
Let’s assume that you squirrel away about 20,000 USD annually. The fund you invest in returns about 5% per year and charges a 1% management fee. After one year, you have a little over 20,000 USD, minus a management fee of 200 USD.
In year two, you would have 40,800 USD. But, thanks to your growing savings, your broker takes a fee of 408 USD. See where this is going already? Let’s keep moving.
By year five, you would have 110,214 USD saved – wow! However, now your annual fee is 1,102 USD. In total, over five years, you would have paid 3,244 USD in costs or more than 3% of your assets.
Let’s fast forward to year ten. You now have 247, 604 USD in assets. Your annual fee is now 2,501 USD, and over a decade, you’ve paid 6% of your net worth in management expenses.
While you will undoubtedly be a millionaire by the time you retire, the percentage paid in fees will only continue to rise. Continue this arrangement, and you will have spent a quarter of your assets in fees after 40 years. In all, your losses could be in the HUNDREDS OF THOUSANDS of dollars!
When shopping for a stock broker, aim for the lowest fee provider you can find. Discount brokers are generally speaking cheap, but not all may be suitable for your needs.
Things To Look For In A Broker
Let’s start by defining the difference between a discount and a full-service broker. A discount broker, as the name suggests, charges lower commissions and low/no management fees.
However, apart from executing trades on the client's behalf, there is no interaction. A discount brokerage provides no advice or analysis. If you lack finance experience, any savings realized through lower fees could be lost through lousy decision-making.
As such, it may be worthwhile paying for a full-service broker, at least in the beginning. While you learn the ins and outs of trading, they can provide insight into current events. They’ll advise you when to buy, what stocks to hold, and when you should consider selling.
When selecting any brokerage (but especially with full-service brokers), make sure to read the fine print. When a brokerage offers a deal that’s too good to be true, the devil is usually in the details.
Often, it’s there where you’ll find the “maintenance fees” we exposed earlier. You may also encounter withdrawal fees, and account minimums. Weigh all these factors when deciding whether to continue considering a broker.
Next, what kind of investor are you? Are you seeking consistent, predictable gains, or do you want to make as much money as possible?
If you’re looking to make cash on a day-to-day basis, choose a broker with low transaction fees.
Day traders move in and out of multiple positions per session. Over the long-term, you’ll lose tons of capital as a trader if you pay high transaction fees.
However, if you’re buying-and-holding, higher transaction fees might be okay if they pay for expert advice/analysis.
Fewer Fees = More Profit For You
Trading platforms provide a valuable service. It’s only fair they make a profit for the value they provide. However, any fee that doesn’t add value to YOUR experience will just cost you gains in the long run.
If you don’t need expert analysis, forgo fees where possible. By being vigilant, you can add untold THOUSANDS to your eventual net worth.