Watch Out For The Fees

There is a great scene out of the movie 'Wolf of Wall Street', if you haven't seen the movie you really should, its awesome. At the start of the film, a young Jordan Belfort goes to Wall Street to seek his fortune as a broker at LF Rothschild. On his first day at the firm, the head broker takes him upstairs to have lunch. During the conversation he says, "nobody knows if the stock is going to go up, down, or in f..king circles, least of all stockbrokers" Further in the conversation he says that the goal of a broker is to keep the client on the ferriss wheel, or in other words, to keep them trading. The reason to keep them trading is increase the amount of commissions that the broker will be earning for their firm.

Obviously, there will be quite a few moral brokers out there who will be trying to provide good advise for their clients, and won't be too concerned about their commissions. As an individual looking for a broker who to invest through, it is difficult to make that decision. But what you can know for certain, is the percentage of fees that a broker charges. On the first stock I ever brought, which was Chemeq, I was charged 2.5% on $2000. This clearly was an absolute rip off. It was brought through Craigs Investment Partners, and I was only 16, so only had $2000, and the minimum that Craigs charged was $50. If I had gone through my main current broker, ASB Securities, I still would have been charged 1.5%, because their minimum brokerage charge is $30. As a comparative example, Interactive Brokers charge 0.08%. Obviously now I have a bit more money, so the $30 charge might be 0.5% or less.

Another example I can give is the Craigs Investment Partners Managed Portfolio Service, which charges 1.25% per transaction on NZ equities, and 1.5% on Australian and International equities. The minimum charge is about $75 NZD; so my $2000 investment in Chemeq would now be charged at a 4% commission. If you were charged 4% every time you brought and sold a stock, you would have to make an 8% capital gain just to break even! If you were to try and beat the markets average of around 8%, you would have to make at least a 16% capital gain! That is clearly not a good way to earn market beating returns over time.

Thankfully, there are a number of extremely cost effective online brokers out there like Stake, Hatch, Interactive Brokers, Jarden Direct and Sharesies. I already stated Interactive Brokers ridiculously low fee of 0.08%. How do the others compare? Sharesies offer a maximum brokerage charge of $5 USD for US Equities, $25 for NZ Shares and $15 AUD for Australian shares. Hatch only charge $3 USD for US Equities (which is the only market they offer). And for amounts over 300 shares, they will charge US 1 cent per share. Stake also charge $3 USD, and as with Hatch they charge a small amount (0.01%) for larger amounts. Jarden Direct charge the same amount as ASB Securities (actually $29.90) for amounts under $15,000, and over that an additional 0.2%.

So looking at the few brokerages I have discussed, it appears that Interactive Brokers comes out on top from a purely cost basis. But because Hatch charge per share, and not on a percentage basis for large amounts, they would actually beat Interactive Brokers with certain shares, in particular Berkshire Hathaway class A stock (currently est. $570,000 per share). In fact, if you were a particuarly large investor in high priced shares, Hatch commissions would be among the best in the world.

Everyone will have their preferences. It is definitely clear though, that the online providers beat the traditional brokerage houses when it comes to having lower trading commissions.