Brokerage Fees Can Eat at Returns


Why has Vanguard had such success? Is it because they had a great marketing strategy? That could be part of the case. However, when Jack Bogle thought of the index fund in the early 1970s he was a laughing stock. Flash forward 40 years later and there are hundreds of index funds, and Bogle’s Vanguard manages trillions of dollars. Why do people flock to Vanguard? It could partially be the marketing, but bottom line its the low fees.

Whether one is an active or passive investor high fees can take a big dent out of your returns. The best way to beat the market for most is to pick a broker with the lowest index fees. However, if you want to actively invest, fees are even more important. The reason being that we are not talking about a few basis points, but many dollars per each buy and sell. Even if you are a buy and hold investor, fees eat away at returns.

A look at online brokerage fees comparison reveals a startling picture and we have some math to prove our point. We will not point names, but rather look at the numbers. If you have $100,000 invested and make just five transactions a month (which would be a low turnover on a portfolio of 25-50 stocks) and plan to hold the account for ten year, just looking at the cheapest online brokers shows a huge scale. Fees can range from $35 to $92 a month, which is around $700 a year! I can think of a lot of better ways to spend $700 than giving it to my broker. All it takes is a few minutes of research and you can consider that $700 saved.

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