What are Brokerage Fees and How Do They Work?

Some things in life are certain: death, taxes and (probably) broker fees. Okay, it doesn’t roll off the tongue quite as easily, but it’s important to understand if you’re planning to get yourself into trading or house-hunting.

It’s a good idea to take a careful look at the types of brokerage fees charged. You don’t want to eat away at your returns but the reality is that you’ll pay broker fees in most cases. It’s possible to find a platform that has low brokerage fees. Here’s how to sift through what can often seem like a really murky world.

What are brokerage fees?

A brokerage fee, also called a broker fee, is a fee charged by a broker. Brokers charge various types of fees for lots of reasons. For example, you may pay brokerage fees when you make purchases, trade stocks or options, to maintain your account or pay for data. If your brokerage fee includes subscriptions for research or investing help on trading platforms, you’ll pay a fee. You may even pay fees if you don’t use your account much (these are called inactivity fees).

Many industries charge brokerage fees — including the insurance and real estate industries.

Types of brokerage fees and how they work

You may pay a brokerage fee plus a few other types of fees when you trade. Here are some of the most common broker fees:

Trade commission

You’ll pay a trade commission when you buy or sell stocks or buy or sell other types of investments. You pay to execute the trade. This fee is sometimes called a base-trade fee or per-trade fee. It’s important to check out a brokerage’s fee schedule before you choose that brokerage for your trading needs. It’s easy to find brokerages these days that charge zero trading fees but they still make money from you in other ways.

Expense ratio

An expense ratio is an annual fee charged by mutual funds, index funds and exchange-traded funds (ETFs). They’re charged as a percentage of your assets under management in the fund.

Management or maintenance fee

It’s easy to confuse the management fee with the expense ratio. However, a management or advisory fee is a fee to cover the operating costs of the fund. (Such as the hiring and maintaining investment advisors.) You’ll pay a maintenance fee or management fee based on a percentage of assets under management. For example, you may see management fees listed like this: Management fee: 0.39%.

Sales load

A sales load is common among mutual funds. They’re paid to the broker or salesperson who sold you the mutual fund. You may also pay what’s called a mutual fund transaction fee when you buy and sell certain mutual funds.

TFSA/RRSP/401(k) fee

A 401(k) fee is exactly what it sounds like — it’s a fee to maintain the plan. 401(k) plans are often passed on you by your employer.

Account transfer fees

Surprise! You’ll be charged money when you transfer your account from one brokerage to another. Brokerages use the Automated Customer Account Transfer Service (ACATS). The average cost to transfer a brokerage account to another brokerage is around $65. Some brokerages offer a waiver or reimbursement of ACAT fees.

Wire transfer fees

Online brokerages, including banks, charge wire transfer fees, which can be steep one-time fees for wire transfers.

Checking account service fees

Any checking account service fees are charged by any checking services connected to your brokerage account, such as brokerages with banking arms like Merrill Edge, for example. Checking and savings account services are not usually connected directly to your brokerage accounts.

Paper statement fees

You might actually be charged for traditional paper statements. You might be wasting $2 per statement — $24 per year! Think about this. That charge could be almost five percent of an account that’s $500! Many brokerages ask you whether you want paper statements. They make it easy for you to switch for all online statements on your account setup.

Account closing fees

If you have to pay a fee to open your account, there might be a fee to close your account. Try avoiding brokerages that require you to pay a fee to close your account — it’s one of the ways that brokerages work to sneak in another fee.

Types of Brokers

There are two different types of brokers: full-service brokers and discount brokers. Let’s go over the differences between each.

Full-service brokers

What’s a full-service broker? A full-service broker is a licensed financial broker-dealer that offers a variety of services to you, the client. These customer services can include:

• Advice

• Research reports

• Retirement planning

• Tax shelter tips

• Asset-managed account recommendations

• Other services

You’ll pay more for all of these services because full-service brokers are paid commissions based on transactions. For example, you may pay a full-service broker $150 per transaction. Discount brokers charge much lower fees, often less than $10-20 per trade. Some brokers even offer commission-free trading.

The benefit to using a full-service broker is that you won’t have to make decisions about your individual trades. Full-service brokers want your portfolio to succeed because they make more money when your portfolio makes money.

Discount brokers

You’ll experience a completely different level of investment advice with a discount broker. You typically won’t get investment advice from a discount broker unless you pay more. This can be a real advantage because they won’t try to push a particular product on you — they have no vested interest in trying to sell you a particular stock, mutual fund or other type of asset.

Discount brokers offer you:

• Low commission rates (sometimes commission-free)

• Online trading platforms

• Tools to help you evaluate and select investments for your needs

• The ability to open a variety of accounts in one place: regular taxable accounts, IRAs and other types of accounts

Broker fees for mortgages

What’s a mortgage broker? Put simply, you can think of a mortgage broker as a middleman. A mortgage broker is the go-between between you and potential lenders. Mortgage brokers can be an attractive option when you want to buy a home. They can help you sort through loan types and rates, which can help you secure the right loan for your home purchase faster. Getting a mortgage broker involved means you don’t have to compare and contrast interest rates, terms, down payment requirements and more all on your own.

In other words, a mortgage broker should have a variety of loan options from various lenders. It’s the mortgage broker’s job to find the best mortgage rate and terms that fit your exact needs. If you prefer a 15-year mortgage at the lowest rate possible, the mortgage broker will work to find your exact match. Another example is if you need a house but can’t put more than, say, six percent down for a down payment, a broker will help you find the right 30-year mortgage that fits those needs.

How mortgage broker fees work

Mortgage brokers don’t work for banks or other lending institutions. They must be licensed and operate independently. They charge fees for their services, which are paid by either you or your lender. In this article, we’ll assume that you’re paying the mortgage lender fee yourself.

The fee you’ll pay will be about one or two percent of the loan amount. However, fees may vary depending on the size of your loan amount and can vary depending on the mortgage broker. This fee may be added to your loan or paid upfront.

Loan brokers are required to disclose all fees upfront and can charge only the fees that are disclosed. Mortgage broker fees will be itemized and the broker should be ready to tell you the details of all the fees.

Know exactly what fees you’ll pay your broker so you can budget for them. The Dodd-Frank Act put new regulations into place on how mortgage brokers get paid.

Before the Dodd-Frank Act, lenders could pay mortgage brokers for getting clients to agree to loans with high interest rates and costly fees. Prior to the Dodd-Frank Act, it would have been possible for mortgage brokers to prey on clients. Now, mortgage brokers cannot:

• Charge you hidden fees.

• Tie their revenue to your loan’s interest rate.

• Be paid for steering you in the direction of another business, such as a title company.

• Be paid by both you and the lender.

• Receive payment unless the deal is closed — unless you paid upfront costs.

Brokers will charge you a small fee but remember, it might be worth it if you don’t have detailed knowledge of the mortgage industry. A mortgage broker may have much deeper knowledge of mortgages, loan officers and mortgage lenders.) Now, with the details involved to protect you with the Dodd-Frank Act, it’s less intimidating to get a mortgage broker on your side.

Average stock broker fees in Canada

Below are some differences between full service investment firms and discount brokerages.

How to save on brokerage fees

When you want to open an account, shop around! Inquire about fees at a variety of full-service and discount brokerage firms. You can also easily check online for a full list of fees. Remember what your goals are before you get intimidated by fees. If you need help getting your investments in order, you may be better off paying for the fees required by a full-service firm. When you meet with full-service providers, ask various questions about fees before you get started.