Brokerage fees can be an underhanded cost that erodes your investment returns. From those baked into funds as expense ratios to fees levied by advisors in the form of asset-based fees, these costs quickly add up.
Moving towards fee-based accounts can bring great advantages for both business growth and client value creation. Find out how you can take full advantage of these new opportunities.
The Benefi
Brokerage fees are an often neglected but critical component of investment returns. From baked into funds as expense ratios to charged as trading commissions per transaction or even advisor service fees, brokerage fees can significantly diminish long-term performance and should therefore be taken seriously as part of an advisor’s service offering.
Brokerage fees have seen substantial reductions, due to intense competition and technological innovation. Online brokers now charge $0 for stock, ETF and options trades and many offer no-fee mutual funds. Likewise, robo-advisors have reduced costs associated with investing by using algorithms for financial planning and asset management automation.
Many advisors acknowledge that transitioning their commission-based clients to fee-based accounts would increase the profitability and sustainability of their practice, but some factors prevent them from doing so – these could include fears that these accounts won’t generate as much income, and that implementation may require additional steps and paperwork.
Margin Accounts
Margin accounts provide you with leverage that enables you to borrow money from your brokerage firm to purchase securities on margin. Although this increases potential gains, it also introduces risk and requires greater insight into the market.
When engaging in margin trading, your broker lends you up to 50% of the purchasing power of your portfolio (usually maximum). They then require that a specific percentage of investment go towards covering this loan amount.
if the value of your assets falls below this threshold, brokerage firms may call in your margin loan and require you to sell some investments. To prevent this situation from arising, closely monitor your account so it remains above its minimum maintenance level and review the margin agreement to understand how interest calculations work – typically you will receive notice of any changes made within it.
Fee-Based Accounts
Fee-based investment accounts differ from traditional commission-based brokerage accounts in that they charge one, flat account fee that encompasses all investment and access services. They often feature reduced transaction fees, transparent pricing of all costs (including trailing commissions) as well as family or household grouping to further decrease fees levels.
This approach eliminates incentive conflicts caused by commission models, where advisors may be encouraged to engage in active trading for personal gain – which may lead to unethical practices like churning that keep portfolios moving solely to generate transaction fees – while at the same time supporting comprehensive financial and planning services provided to their clients.
Before adopting a fee-based brokerage model, advisors should carefully assess its suitability for their client base and devise a plan to communicate its introduction to clients – emphasizing its transparency and value-add – in a clear manner. Those who successfully implement such models usually find their clients eagerly embrace change.
Fee-Based Representatives
Fees can add up quickly. Whether they’re hidden within a mutual fund’s management expense ratio (MER), trading commission charges or being levied as a percentage of your total assets by an advisor, it is crucial that we stay on top of them all.
Financial professionals frequently offer fee-based brokerage accounts as part of their services, known as Non-Managed Fee-Based Accounts (NMFBAs or wrap accounts). NMFBAs tend to be commission-based accounts that do not provide investment advisory services.
Due to intense competition, trading fees for stocks and ETFs have fallen to $0. On many online platforms, brokerage firms only charge annual asset-based fees that tend to be much lower than what would have been charged by financial professionals or robo-advisors that manage portfolios for less. Still, it is wise to factor these fees into long-term planning decisions as these costs could even be tax deductible.
