Gareth Lane Updated Dec 19, 2022
Mate Checked
What are the main considerations when looking for a broker – fees, commissions, minimum balances and trading platform technology? Times have changed for investors today, with competition high and fees seemingly in a race to the bottom; it seems like there are a plethora of brokers to choose from.
Exactly which broker you choose to partner with will come down to what matters most to you. If you like the convenience of using a broker whom you do banking with, then Commsec might be the right choice for you, assuming that you bank with CBA. If you’re after the red carpet treatment, then a full-service stockbroker might be worth considering. You’ll get curated stock picks from your advisor and exclusive deal-flow to participate in, but all this comes at a premium. If trading technology is what tickles your fancy, then Interactive Brokers is hard to beat. They offer arguably the best trading platform on the market with fees very hard to beat.
How much investing experience and knowledge you have should play a large part in the type of broker you choose to partner with because this will determine how involved you have to be when placing a trade. Most online brokers are very much a self-service trading platform which you the investor has to drive yourself. There are varying levels of technology offered by online brokers which range from the highly technical trading platforms for professional traders and straightforward and user-friendly solutions.
If you are the kind of investor that likes to get their hands dirty with all the technological bells and whistles, then you might want to consider Interactive Brokers. It has long been the preferred choice of investment professionals and advanced traders, but they have recently launched a streamlined version of their platform called IBKR Lite for entry-level traders. Investors receive unlimited free commissions when trading on US stock exchanges when trading shares and ETFs. Where Interactive Brokers is in a league of its own is that you can trade futures, FX, fixed income, managed funds, options and more you can do so in over 120 markets and 30 countries. You can see why it’s the choice for so many SMSF investors today.
It’s not often you think about trading commissions and fees as a percentage of your investment returns, but if you are paying high fees, unfortunately, it needs to be considered. If we think about Commsec for example, which charges Australian share investors $10 for trades up to and including the value of $1000 this equates to between 1% and 2% in fees depending on the trade size ($1000 – $500). The costs are even higher for international share investors.
The aim of the game with investing is to increase the value of your portfolio and your overall net worth, so it’s essential to factor in all costs involved in the process. Every time you invest in the market, you are taking a risk that the value of the asset will rise or fall which is one consideration. The other often overlooked cost to investing in the commissions and fees which are charged every time you place a trade. Relative to the overall investment amount, they may seem small, but if you are an active investor, they can quickly add up. So is it possible to invest regularly but keep your transaction costs low? It certainly is, but you might have to look outside the conventional online brokers to find it.
You would be hard-pressed to find an investment opportunity that doesn’t come with some kind of fee involved. There’s no such thing as a free lunch, and this adage is especially true in the world of finance. Credit cards charge a monthly card fee and savings accounts usually don’t hold your funds for free, whether the cost is direct or indirect, they will make money from you somewhere along the way.
Brokers will typically charge investors what’s called a commission each time the investor places a trade to purchase securities. This commission covers the cost to execute the buy or sell transaction, and in some cases, the advice that comes from the broker regarding the trade. Full-service brokers will usually charge a higher commission and online DIY-brokers will typically be more cost-effective. Ensure you take the time to understand all of your broker’s fees before taking the plunge on a new investment.
An account keeping fee is often charged by a variety of financial services providers including brokers, banks, and investment advisors to maintain client accounts and cover the costs of any reporting or administration associated with the account. The fee is usually charged annually and can either come in the form of a flat fee, charged as a percentage of the balance which is held in the account or based on the services the company provides.
As you would expect, investment management fees are charged by investment managers, and they vary depending on just how involved the investment managers process is. Active investment strategies like hedge funds or stock pickers will demand a higher price than a more passive styled index fund. The fee charged is usually a percentage of the investment under management which ranges from between 0.2% to 2.5% as a rule of thumb.
Worth noting: you should always look at the commissions specific to the investments or securities you are planning to trade the most. Investing in Australian shares will have a different fee structure to international shares in most cases, and that’s not to mention the many other types of securities available to invest in which include fixed income, futures, FX, investment funds and ETFs.
Australian Shares: most local stockbrokers charge a commission to buy and sell shares on the ASX, by either a flat commission amount or a percentage of the transaction. The amount you pay depends on the broker you use and the service levels they have provided before the purchase of the shares.
US Shares: there are several US stockbrokers who are offering commission-free trades on US equity exchanges for specific asset types like shares, ETFs and mutual funds. Interactive Brokers are one of these and are well worth checking out if you are planning on trading shares in the US.
Options: the fee for trading options on direct shares, ETFs and futures contracts typically incur a per-contract cost of anywhere between $0.20 – $2.00 depending on your broker and what asset you are trading.
ETFs: also known as exchange-traded funds, they trade just like any other share where you would buy and sell on the ASX during market hours. This means they would incur typically incur a commission or fee when traded on the ASX. Interactive Brokers also offers commission-free trades on US-listed ETFs.
It is common for a broker to require a minimum initial deposit of around $500, and this is commonly the minimum trade amount for brokers like Commsec, NAB trade and other Big-4 online broking platforms. You might be able to open an account without the deposit. However, you will not be able to place a trade without the minimum of $500 as a rule of thumb.
Account fees are hard to avoid, but you can certainly try to keep them as low as possible. Some brokers charge a monthly account keeping fee which covers things like reporting and administration on the account. You might also incur a fee when transferring funds out of an account to another broker.
Market data fees can vary drastically depending on the level of data that you so desire. If your trading strategy requires live market data with liquidity and order-book information, then you can expect to pay a few hundred dollars a month for this service, and this is for each exchange you want the data for. Research and analysis might come at a cost, combined with inactivity fees if you are not trading for extended periods.
As a novice investor, you probably don’t need all the trading platform bells and whistles to get started. Still, things like information, educational videos and seminars might be what you need most. Many brokers will help investors get started by offering clients free educational online courses about investing and trading. Full-service brokers offer investor briefings and roadshows to their account holders which can give insight to a company or management team which is hard to quantify on a paper report or email.
More experienced or active traders will likely want to partner with a broker who can support their activity and technology needs with regards to trading platforms, market data, research and analysis. Interactive Brokers offers volume discounts for active traders so they can further reduce their transaction costs and not inhibit the investment strategy.
By taking the time to assess your investment strategy and comparing your intended approach with the features and costs associated with each prospective broker, you will save time and money when you begin your investment journey.
