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Online Investing Fees You Might Not Know You’re Paying

Dec. 11, 2015
Brokers, Investing
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Online brokers are quick to point out their trade commissions, often right on their home pages — sometimes in a comparison chart that calls out the competition.

But if you think commissions are the only costs you’ll incur when using your online brokerage account, you’re mistaken. Other fees abound, sometimes in the fine print. Here are four of the most punishing, and what they could cost you:

Inactivity fees

If you trade often or maintain a high balance, you likely won’t run into these. But if you’re a casual trader or are prone to forgetting your accounts  — yes, that happens — you should check your brokerage’s policies. The worst inactivity fees can lower your account’s value by up to a couple hundred dollars a year. That could easily wipe out returns on a small balance.

Avoid these costs by staying above activity and account balance minimums or choosing a broker that doesn’t assess inactivity fees, such as OptionsHouse or TD Ameritrade.

Potential cost: Paying $50 in annual inactivity fees for 10 years could cost you $740, when you factor in the loss of investment gains.

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Expense ratios

These aren’t necessarily your broker’s fault, unless its investment selection is poor or limited. But they’re expenses you should consider nonetheless.

Expense ratios are annual fees tacked on to mutual funds, index funds and exchange-traded funds, or ETFs. They’re siphoned out of invested money, so many investors don’t think much about them. But choosing high-fee investments can make a huge difference in your portfolio’s value when you reach retirement.

Unlike some investing fees, expense ratios can’t be avoided. But you can minimize them by researching them for each fund you buy. Expense ratios are listed on your broker’s fund information page or in the fund’s prospectus, and are expressed as a percentage — for example, a 0.70% ratio means you’ll pay $7 per year for each $1,000 invested.

Index funds and ETFs tend to have lower expense ratios than mutual funds. But don’t assume you’re getting a good deal without comparing the ratio of the fund you’re considering to the ratio for other, similar funds.  

Potential cost: If you invested $10,000 in a fund with a 0.20% expense ratio, you’d have $9,451 more after 10 years than if you’d invested it in a fund with a 0.70% ratio. 

Account closing and transfer fees

Many brokers charge a fee — usually between $25 and $75 — to close or transfer your account. These fees are unlikely to add up quickly, unless you’re the type to broker-hop. But there’s at least some incentive to do that, because brokers tend to offer impressive promotions to new customers.

To decide if you should swallow an account transfer fee, do some quick math. Weighing the transfer cost against what you’ll save in commissions and other fees should help you decide whether switching is worth the cost. Then consider factors that can’t be quantified so easily, such as trading platforms and investment selection.

Some brokers, including TradeKing, offer to reimburse new customers’ account transfer fees. And several brokers charge different fees depending on the type of account or amount you’re transferring. Closing an IRA might cost less than closing a taxable brokerage account, and transferring part of your account is typically cheaper than a full transfer.  The key, as always, is to know what you’re paying.

Potential cost: $25 to $75

Mutual fund transaction fees and ETF commissions

If these are your investments of choice, find a broker that trades a lengthy list without commissions or transaction fees — otherwise, you could pay upwards of $30 to invest in a mutual fund and the broker’s standard trade commission for an exchange-traded fund. Both will hurt if you regularly invest in the same fund, the way many retirement investors do.

Most full-service brokers have a healthy selection of both no-transaction-fee mutual funds and commission-free ETFs; discount brokers tend to have a small number of options, if any. The rub: As you might expect, discount brokers have lower stock trading commissions.

That’s why it’s important to know what you value most in a broker. Before picking one, make sure it has the investments you want and that you can access them affordably.

Potential cost: If you’re charged a commission to invest in an ETF each month, you’ll pay between $60 and $120 each year, depending on your broker. Mutual fund transaction fees can be as high as $30 or $40. That could add up to $360 or more during a year of monthly investments.

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Arielle O’Shea is a staff writer at NerdWallet, a personal finance website. Email: [email protected]. Twitter: @arioshea.

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