Understanding Broker Compensation
By: Source: AARP.org Date Posted: 2005-03-20 12:09:09
Stockbrokers are sales people. Their earnings come from commissions. The more shares of stock you buy and sell, the more money your stockbroker makes.
What You Should Know
Understanding Commissions
Every time you buy a share of stock, your stockbroker receives income that is equal to a certain percentage of your total trade. This is called his or her commission.
Commissions come in every shape and size. You could pay front-end commissions at the time you invest, or back-end fees when you sell an investment product. You can also pay commissions that increase as your assets grow. Remember:
- Commissions can reduce the value of your investment. Let's say that you put $10,000 into a mutual fund and that your broker earns an up-front, 5-percent commission on the transaction. Only $9,500 would be invested. Your broker would get the other $500.
- You have the right to know about all your investing costs. Ask your broker about commission rates, annual fees, transaction costs, and other expenses. You should be told in advance about any fee that will show up on your account statement.
How Much Will It Cost?
The actual cost of doing business with a stockbroker will depend on how much you invest and what kind of broker you use. Generally, the more you invest at one time, the lower the commission percentage will be. Expect commissions to be about two percent of your trade. You'll save some money with a discount broker. Internet brokerage firms offer the lowest commissions.
Don't Confuse a Sales Pitch with Impartial Advice
A good stockbroker will propose investments that are tailored to your goals and financial situation. But other stockbrokers may not be so upstanding. They may encourage you to buy investment products that bring them higher commissions or bonuses. Find out if your broker will receive any special payments if you follow his or her investing advice. You have a right to know if your broker could be putting his or her own gain ahead of your best interests.
Consider A Flat-Fee Arrangement
Some brokerage firms offer accounts with no commissions. Instead, you pay an annual fee, which is usually based on the amount you have invested. In return, you get a certain number of free trades each year. The single fee should cover the broker's services and periodic reports on the status of your account.
With a flat-fee arrangement, you can be sure that your broker will work hard to make sure your investments do well. Flat-fee brokers make more money if your assets increase in value. They aren't as likely as other brokers to sell you high-commission stocks so they can make more money.
If your broker doesn't offer a flat-free arrangement, try to negotiate a lower commission.
For More Information
National Association of Securities Dealers
The National Association of Securities Dealers (NASD) has a public disclosure line for information on brokers. Call 1-800-289-9999. The hot line is open Monday through Friday, 8:00 a.m. - 6:00 p.m. ET. On NASD's Web site, you can learn about several NASD programs aimed at protecting consumers. Visit the Investor Protection section of the Web site for information about filing a complaint with a broker and to view rules and laws that affect the securities industry.
URL: http://www.nasdr.com/investors.asp
North American Securities Administrators Association (NASAA)
The NASAA can give you the telephone number of your state securities agency. Go to their Web site and click on "Find Regulators."
URL: http://www.nasaa.org
Securities and Exchange Commission (SEC)
The SEC can help you check out brokers and advisers.
URL: http://www.sec.gov
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