Unless you have a huge amount of money invested in the market and you're
making your own trades, you probably use a stock broker—hopefully a discount broker. Why does that
matter? Because the incentives in place for a traditional broker might work
against your own interests.
You probably pay a flat rate per transaction with your broker. Hopefully
you're paying $10 or less. Your broker has to do some work to mediate these
transactions, but you're paying them for work you could do yourself with an online discount broker.
Every dollar you pay someone to do work that you could do (and probably
faster) is a dollar that's not earning money for you.
In the olden days, unscrupulous brokers made lots of trades on behalf of
their customers, churning their
accounts to generate more commissions. This is unethical and illegal. You're
not likely to find this happening at a reputable brokerage, but it only
highlights the fact that the
reward structure of Wall Street has its agenda aligned strongly against
yours.
What do stock brokers and investment brokers do? That depends what you're
paying for. Whether you know it or not, you're paying for
something.
Some Wall Street traders make make millions of dollars, but they're rarer
than you think. Salaries depend on experience and geography. Brokers working in
New York City will make more than brokers working in the Midwest, for example.
The top
10% of brokers in New York City can make over $300,000 annually. The
potential is unlimited at the tippiest of the top, if they deliver large
amounts of profits to their investors.
Brokers make their money in several different ways, but their money mostly
comes from you.
Broker Fees
Want a report on a stock you heard about? Want a tip on a new ETF? Every time you call your broker for
advice, get out your wallet.
It's okay to pay someone to help you do research or to do something you
don't have the time or skill to do on your own, but consider what you get for
your money. If it's worth $50 not to do a few minutes of research on your own
(and remember, you still have to read and understand whatever your broker sends
you), it's worth it—as long as you understand what you're buying
before you invest.
Referral Bonuses
Sometimes brokerages and other companies want to encourage investors to buy
into specific investments, especially mutual funds. They'll offer brokers
referral fees to sign up new investors. Sometimes these funds are good deals.
Other times, they aren't. If you're not careful, your broker might pressure
you into buying something you wouldn't normally invest in just to get their
bonus.
Commissions
According to the PayScale
stock broker survey, the largest source of wages in this profession (and
the source with the largest range of variance) is commissions. As with many
sales professions, with experience and promotions, salary often becomes a
negligible component of total compensation—the better the broker, the
more in commissions he or she expects to receive. Sometimes a stockbroker can
make a six figure salary from commissions alone.
Where does this money come from? You already know the answer; the more you
trade, the more you pay. Chasing the fluctuations of one stock or another
generates more and more fees and income for your broker. Even if your broker
isn't providing market-beating advice to you, you're still paying for their
time.
When Should You Pay Broker Fees?
Should you pay for a full-service broker? It depends on the value you get!
If you're getting good research and finding undervalued stocks that you
couldn't (or wouldn't) find on your own, fees might be reasonable. If you're
getting market-beating
returns even after you take out a percentage of management expenses, it
might be worth it. You can learn how to do stock research and picking on your
own anyhow!
You don't have to accept every opportunity that comes your way from a
broker. You don't have to accept any. But if you're not getting great advice,
why are you paying for it? Most individual stockholders don't see amazing
returns. They pay handsomely every year for mediocre gains. (Ask yourself "how
much does a stock broker earn from me?" and compare that to how much he or she
makes for you.)
You're often better off buying something with very low fees, such as the S&P 500 Index Fund. Until you're
confident enough to evaluate investments to see if you're getting the value
you're paying for, stick with something with proven value and low costs. (See
The Little Book of Common Sense Investing for more
details.)
If you're content to make a few trades per year and comfortable doing
research on your own, a discount broker will give you a lot of what you need
for low per-transaction fees, with the option to pay more for personal advice
only if you want it. If you're reading this, you know you don't even need a
broker to buy and sell stocks, much less to do your research for you.
Take control of your investments. Save a few dollars on every trade. Put
more of your money to work for you, and it will pay off.
