FAQ: What Are Brokerage Fees and How Do They Work?

By Indeed Editorial Team

Published September 22, 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

For businesses and individuals, investing in securities and building a strong portfolio is a viable way to develop significant wealth over an extended period of time. However, when working with a broker, it's important that you understand how their fee system works, as these commission fees can vary widely depending on the firm and industry. As you familiarize yourself with this concept, you can make a more informed decision about choosing the brokerage that's right for your needs.

In this article, we review what a brokerage fee is and examine how they work.

Related: Brokerage vs. Investment Bank: What's the Difference?

What is a brokerage fee?

A brokerage fee is a commission that a broker charges their clients. They charge this fee to execute financial transactions and provide other specialized services on behalf of these individuals. Some of the many services that brokerages provide may include consultations, advice, sales, purchases, deliveries and negotiations. There are many industries in which brokerages charge fees, such as delivery, real estate insurance, investment and financial services.

The exact amount that someone pays in brokerage fees can vary significantly, often depending on the industry and the specific brokerage's payment policies. Some base it on a flat fee, a percentage of the transaction or a hybrid of both concepts. For example, brokers in the financial securities industry often charge a flat fee to facilitate investments and trading. In the real estate industry, you can see a mix of both concepts. Some real estate brokers may charge a flat fee while others charge between 1% and 2% of the total loan amount.

Related: How To Become a Real Estate Broker (Average Salary and Steps)

How do brokerage fees work?

The brokerage fee is just the payment that someone owes the broker to hold and manage their investments and securities. Sometimes this might include an annual fee that you pay at the beginning or end of the year. Other times, you may incur an inactivity brokerage fee if you're not trading at least semi-regularly.

Some brokers may even charge you for simply researching investment data on your behalf. There's no one answer because brokerages function differently. The exact way that brokerage fees work ultimately depends on each individual brokerage, the services they provide and the industry.

Related: Broker vs. Realtor: What's the Difference?

What are the main types of brokerage fees?

There are three main types of brokerage fees, including:

Online brokerage fees

Of the three main types, online brokerage fees are usually the least expensive. The primary purpose of online brokerages is to allow investors to conduct a variety of online trading. While customer service availability is limited, many online brokers remove the unique commission fee that you would likely incur for share trades with other brokerages. However, future trades and options commissions fees still apply to this type.

As is the nature of brokerage fees, these can vary for several reasons. For instance, fees might differ based on a per-share or per-contract charge. There are also account maintenance fees which often vary between $0 and $50 per account for each year.

Discount brokerage fees

Discount brokerages have the smallest selection of products and don't provide any investment advice as well. To compensate for having fewer options, they charge significantly lower fees than what full-service brokers normally charge. For each trade transaction, discount brokers usually charge a flat fee. This fee can range from less than $5 to more than $30. Typical account maintenance fees usually range close to 0.5% annually based on the number of assets that the brokerage is currently holding.

With the advancement of communications technologies, many online brokers also dually operate as discount brokers. These hybrid discount-online brokers are highly appealing to people with smaller capital to trade for lower fees. In the modern era, most discount brokers function as online brokerages and blend the benefits of both types to create a firm that can reach an expansive audience, from accomplished professionals to college students.

As such, discount online brokers compose much of the investment, financial technology and securities industries. Though they don't provide clients with assistance, these types are usually easy to learn and navigate.

Full-service brokerage fees

As the most diverse and expensive of the brokerages, full-service brokerages provide an expansive selection of services and products, such as tax consultation, tax preparation, portfolio review and development, research and advice, retirement planning, estate planning and other essential financial services.

These firms are quite versatile and can provide services through telecommunications or in-person. Because of this, they receive the largest brokerage fees, with some firms charging more than $100 per trade for orders that a human broker places. Under current industry standards, full-service brokers usually charge a 1% to 2% fee of the client's total managed assets.

This type of firm is particularly beneficial for people who are unfamiliar with how the system works or simply don't have enough time to stay updated on all the complex nuances of issues like estate and tax planning. The support that clients receive is highly personal, with each individual receiving the help they need to meet their individual financial goals and investment aspirations.

Everyone has different financial conditions, so it's important for full-service brokerages to provide wealth management services that are unique to each client's personal circumstances. An assigned stockbroker acts as the client's main point of contact.

Related: FAQ: What Degree Does a Stockbroker Need? (Plus Certifications)

How can brokerage fees affect returns?

Over time, brokerage fees add up, even for the small ones. The combination of just a few investment fees can noticeably reduce the amount of returns for your portfolio. For example, if your investment portfolio rose by 7% over the last year, but you paid the broker 2% in expenses and fees, then your total returns only come out to 5%. This is why it's crucial that an individual clearly understands the fees that each firm charges before doing business with them. Some brokerages require excessively large fees for every investment they make on your behalf.

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