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10 Things Your Online Broker Won’t Tell You

Dec. 16, 2015
Brokers, Investing
10 Things Your Online Broker Won't Tell You
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Americans who invest outside of a workplace retirement plan often do so through an online brokerage account. It’s typically an IRA account or, if that is maxed out, a taxable account.

There’s much to be said for online brokers, which have largely replaced the traditional stockbroker. These companies allow investors to quickly and inexpensively place trades via computer (and increasingly, mobile phones).

Still, as with any service, it’s important to read the fine print. In many cases, you’ll find these 10 things buried there:

1. You may be paying an inactivity fee

Some — but not all — brokers require a certain number of trades per month, quarter or year. If you fall short, you may pay an inactivity fee, which generally ranges from $50 to $200.

Be sure to read through the broker’s fee schedule to make sure you’ll be able to meet the minimum requirements. In some cases, trade minimums will be waived if you stay above a certain balance; in others, you’ll have to execute a set number of trades and meet a required account balance.

2. Switching brokers is easier than you think

Changing brokers could save you money and boost your returns. But no one relishes the administrative hassle of moving accounts; filling out online applications and getting used to a new broker, with a new trading platform and tools, isn’t fun.

However, these days, switching brokers is easier than ever. Applications are done online and money is transferred seamlessly and electronically. You can even transfer most assets as-is, meaning you don’t need to sell your investments before the transfer. FINRA has a good overview of the account transfer process.

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3. You’ll pay to transfer money

The point above comes with one caveat: Most brokers charge an account transfer fee of $50 to $75. That’s the cost to transfer your full account; if you want to transfer just a portion, you’ll likely pay less.

There are also other account fees you’ll want to be aware of, for things like broker-assisted trades, paper statements and closing an IRA account. And in some cases, brokers will charge extra for research, streaming data and premium trading tools.

4. A robo-advisor might do more for less

Robo-advisors are a relatively new financial service that is quickly gathering steam. These services manage investor money via computer algorithm for a small fee, typically using low-cost exchange traded funds (ETFs).

Large brokers like Vanguard and Charles Schwab have launched robo-advisor arms; Fidelity is currently testing its own version. Smaller startups like Betterment and Wealthfront have quickly amassed an impressive customer base; Betterment’s assets under management grew from $2 billion to more than $3 billion in 2015 alone.

Robo-advisors aren’t for everyone, because the investor himself is largely hands-off. They also typically don’t invest in individual stocks or mutual funds. But if you’re the owner of an online brokerage account and you’re investing in the same few mutual funds or ETFs each month, you might consider this managed solution. In some cases, the cost of management and the ETF expense ratios will be less than the expense ratio of a managed mutual fund like a target date fund.

5. Investment minimums may be higher than broker minimums

There are several brokers that require no minimum investment. But mutual funds and index funds may require a minimum investment of $1,000 or more. If you can’t meet it, your money may sit in your brokerage account in cash until you can.

That doesn’t sound so bad, but you should know that online brokers tend to pay interest rates on cash that are much lower than you’d earn in an online savings account — in some cases, 0.05% or less. That means if the investment you have your eye on has a minimum you can’t reach, you’re better off building up a pot of cash in a savings account, then transferring it over once you have enough.

A couple of alternatives: There are index funds that can be purchased for as little as $100. Also, some ETFs, which are traded like a stock, can be found for under $100 a share.

6. You can trade commission-free

Apps such as Robinhood allow investors to purchase stock (and, in the case of Robinhood, ETFs) completely free of charge. There are drawbacks: They don’t come with the bells and whistles of a typical online broker — no trading platforms, for example — and Loyal3 in particular has a very limited investment selection. But if cost is your main concern, both apps are well worth checking out.

Another option for commission-free trading: Merrill Edge. Customers who maintain a combined balance of at least $25,000 in their Bank of America deposit accounts and Merrill Edge self-directed accounts qualify for up to 30 free trades per month.

7. It’s hard to qualify for promotions

The online broker competition is fierce, so most companies attempt to lure new customers with promotional offers. But to qualify for the best deals, you’ll need to meet high deposit requirements, in some cases north of $50,000.

If you can do that — by rolling over an old 401(k), for example, or moving your brokerage account from one provider to another — you’ll often get cash bonuses and free trades for a limited time.

8. Broker trading platforms aren’t open to everyone

In many cases, a broker will offer two trading options: All customers will have access to a platform with a limited number of features or have the ability to trade through the broker’s website. A second, premium trading platform may be available only to customers who meet a minimum balance or who execute a minimum number of trades.

There are, however, brokers that offer a number of trading platforms to all customers — TD Ameritrade is known for this, and its premium trading options such as thinkorswim and Trade Architect are one reason it gets away with charging relatively high commissions.

9. If you suffer account fraud, you may be liable for losses

According to the Electronic Funds Transfer Act, if your bank account is breached or your debit card lost or stolen, your liability is limited to $50, as long as you report the loss or theft within two business days.

Online brokerage accounts don’t enjoy the same federal protections. Though most brokerages do reimburse customers if their accounts are breached or compromised due to unauthorized activity, the waters are murky here. In some cases — particularly if you are deemed negligent, which could amount to the simple click of a phishing link — you may be liable for your losses. It’s up to you to ask your broker about its policies. Here’s how to protect your brokerage account from fraud.

10. You can trade ETFs commission-free

ETFs trade like a stock; as such, they fall under the stock commission section of a broker’s fee schedule. So if you dollar-cost average into an ETF (that is, you invest a set amount on a regular basis), you could pay a trade commission each time. If that commission is $9.95, and you’re investing $100, you’re losing nearly 10% right off the top.

But some brokers have lengthy lists of commission-free ETFs. If ETFs are your investment of choice, you’re going to want to choose a broker like this. If you’re investing in ETFs and your broker is charging a commission, you might want to consider switching. (Here are NerdWallet’s picks for the best online brokers for commission-free ETFs.)