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Survey finds investors underestimate brokerage trading fees

A broker reacts while trading at his computer terminal at a stock brokerage firm in Mumbai, India, June 29, 2015. REUTERS/Danish Siddiqui/Files

A Fidelity Value Survey released Tuesday found that while more than four in 10 (44%) U.S. investors polled cite low commissions and fees as the primary reason for selecting a brokerage firm, many are unaware of the nuances of how firms charge for stock and bond trades.

The survey also indicated that three out of four investors would consider changing brokerage firms to one that provides superior price improvement -- but again, many are unaware of how to evaluate it.

While some brokers are becoming more transparent in the bond market, charging a clear, upfront commission and displaying recent trades, other "markup-based brokers" still cling to the old model and include an additional markup fee in the price of the bond that is not disclosed prior to the trade.

In a Fidelity-commissioned analysis of bond pricing, Corporate Insight found that bond prices from brokers that did not disclose their markups and fees were on average $13.97 higher per bond than firms that charge a fully disclosed bond trading fee of $1 per bond.

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For an investor who purchases $100,000 in face value of bonds annually, that discrepancy, on average, could save $1,397 a year compared to markup-based brokers.

 

“We embarked on this bond study with the hypothesis that different pricing practices could have an impact on an investor’s wallet, but what surprised us was the significance of the impact," according to James McGovern, vice president of Consulting Services at Corporate Insight.

According to Fidelity, when it comes to stock trades, it's also important for investors to look for firms that execute stock trades with both speed and "price improvement" (when a brokerage is able to execute a trade at a price lower than the ask for buy orders or higher than the bid for sell orders).


"It is important for investors to understand how brokerage firms charge for and execute stock and bond trades, which can have a real impact on a customer’s wallet, Ram Subramaniam, president of Fidelity's retail brokerage business, said.

Fidelity suggests investors ask six key questions when evaluating a brokerage firm:

1. What are the commissions and fees for stock, mutual fund, options, bond and ETF trades?

2. Is the firm a trusted financial brand?

3. What criteria are used to route my stock trades, and what level of price improvement does it provide?

4. Does the firm offer the selection of investments I need to achieve my investing and cash management goals?

5. Does it have robust education and research offerings that fit my experience level to help me be a better investor?

6. What options do I have for customer service (e.g. phone, chat, email, in person) and is it available when I need it?