Ten things your online broker won't tell you
Americans who invest outside of a workplace retirement plan often do so through an聽聽It鈥檚聽typically an聽聽or, if that is maxed out, a taxable account.
There鈥檚 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鈥檚 important to read the fine print. In many cases, you鈥檒l find these 10聽things buried there:
1. You may be paying an inactivity fee
Some 鈥� but not all 鈥� 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鈥檚 fee schedule to make sure you鈥檒l be able to meet the minimum requirements. In some cases, trade minimums will be waived if you stay above a certain聽balance; in others, you鈥檒l have to execute a set聽number of trades and meet a required account balance.
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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鈥檛 fun.
However,听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鈥檛 need to sell your investments before聽the transfer. FINRA has a good聽.
3. You鈥檒l pay to transfer money
The point above comes with one caveat: Most brokers charge an account transfer fee of $50 to $75. That鈥檚 the cost to transfer your full account; if you want to transfer just a portion, you鈥檒l likely pay less.
There are also other account fees you鈥檒l 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
聽are a relatively new financial service that is quickly gathering聽steam. These services manage investor money via computer algorithm for a small fee, typically using low-cost.
Large brokers like Vanguard and Charles Schwab have launched robo-advisor arms; Fidelity is currently testing its own version. Smaller startups like聽听补苍诲听聽have quickly amassed an impressive customer base; Betterment鈥檚 assets under management grew from $2 billion to more than聽$3 billion in 2015 alone.
Robo-advisors aren鈥檛 for everyone, because the investor himself is largely hands-off. They also typically don鈥檛 invest in individual stocks or mutual funds. But if you鈥檙e the owner of an online brokerage account and you鈥檙e 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聽will be less than the expense ratio of a managed mutual fund like a聽.
5. Investment minimums may be higher than broker minimums
There are several brokers that require no minimum investment; these include聽,听听补苍诲听. But mutual funds and index funds may require a minimum investment of $1,000 or more. If you can鈥檛 meet it, your money may sit in your brokerage account in cash until you can.
That doesn鈥檛 sound so bad, but you should know that online brokers tend to pay interest rates on cash that are much lower than you鈥檇 earn in an online savings account 鈥� in some cases, 0.05% or less. That means if the investment you have your eye on has a minimum you can鈥檛 reach, you鈥檙e 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 (聽is known for its selection here; the broker has a $1,000 minimum but waives it with automatic monthly transfers of $100 or more). 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聽听补苍诲听聽allow investors to purchase stock (and, in the case of Robinhood, ETFs) completely free of charge. There are drawbacks: They don鈥檛 come with the bells and whistles of a typical online broker 鈥� no trading platforms, for example 鈥� 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聽: Merrill Edge. Customers who maintain a combined balance of at least $25,000 in their Bank of America deposit accounts and聽Merrill Edge self-directed accounts qualify for up to 30 free trades per month.
7. It鈥檚 hard to qualify for promotions
The online broker competition is fierce, so聽most companies attempt to lure new customers with promotional offers. But to qualify for the best deals, you鈥檒l need to meet high deposit requirements, in some cases north of $50,000.
If you can do that 鈥� by rolling over an old 401(k), for example, or moving your brokerage account from one provider to another 鈥� you鈥檒l often get cash bonuses and free trades for a limited time.
8. Broker trading platforms aren鈥檛 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鈥檚 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 鈥� TD Ameritrade is known for this, and its premium trading options such as聽听补苍诲听聽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,听, as long as you report the loss or theft within two business days.
Online brokerage accounts don鈥檛 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 鈥� particularly if you are deemed negligent, which could amount to the simple click of a聽聽link 鈥� you may be liable for your losses. It鈥檚 up to you to ask your broker about聽its聽policies. Here鈥檚 how to聽.
10. You can trade ETFs commission-free
ETFs trade like a stock; as such, they fall under the stock commission section of a broker鈥檚 fee schedule. So聽if you dollar-cost average into an ETF (that is, you聽invest a set amount on a regular basis), you could pay a trade commission each time. If that commission is $9.95, and you鈥檙e investing $100, you鈥檙e losing nearly 10% right off the top.
But some brokers have lengthy lists of commission-free ETFs. If ETFs聽are your investment of choice, you鈥檙e going to want to choose a broker like this. If you鈥檙e investing in ETFs and your broker is charging a commission, you might want to consider switching. (Here are NerdWallet鈥檚 picks for the聽.)
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