Banks are about as popular as the flu right now and because of the constant barrage of fees, both hidden and in plain sight, their lack of popularity in the eyes of consumers is well deserved. But the traditional banks aren't the only financial institutions with a list of fees. Have you checked your investment broker lately? Even the seemingly little-guy-friendly discount brokers can hit you with some fees that seem unnecessary; here are some to watch out for.
Some brokers charge you an annual fee they call a custodial fee. Much like an annual fee on a credit card, the brokerage will likely tell you that it covers the administrative work required to service your account. Also much like a credit card, you shouldn't pay the fee. Many discount brokers have individual retirement accounts (IRA) and other investment accounts that don't have a yearly custodial fee.
Think of your investment account like a cruise ship. First, you pay the fare to get on the boat and sail away but where they really make their money is all of the food, drinks and activities you charge to your account.
Your investment account is similar. The broker makes their money when you buy and sell investment products. If you're the long-term buy and hold type of person, the brokerage doesn't make money. Some charge an inactivity fee if you don't buy and sell a certain amount each year.
Options trading has taken off over the past few years but retail investors have to be careful, especially when trading small amounts of options contracts. One broker charges $7 plus $1.50 for each options contract transacted. All brokers have an additional options fee that is often priced per contract. Although not hidden, expect the options fee to be in smaller print than the cost to trade stocks.
Fees to Close Your IRA
In order to discourage transferring to other brokers, most charge a fee to transfer or close; these range from $25 to $75 per account. Just as you shouldn't pay custodial fees, you shouldn't have to pay to get your money back. Since not all brokers charge a fee to close or transfer an account, consider those brokers first when deciding where to keep your investment funds.
Just as you have to pay interest on any type of loan, you also have to pay interest when your broker loans you money for investing purposes. This is called a margin account. Calculating the interest can be difficult but it may be 9% or more depending on the brokerage. CNBC's Jim Cramer advises retail traders not to trade on margin but if you do, consider how well your longer-term trades have to perform just to pay the margin interest.
Brokers aren't going to charge you to keep cash in your account, but they aren't going to pay you much either. Although they'll likely pay you a little bit of interest on your cash, you could do better by keeping your money in a savings account at a credit union. It won't be much but even 1% from a credit union is better than what your broker gives you. If you're going to put the cash to work in the very near future, keep it with your broker. If you plan to keep your money in cash for a longer period of time, give it to a credit union.
The Bottom Line
To be fair, some of these fees are charged to you because they first have to pay the fee themselves. Before opening an account with a broker, read all of the boring, fine print on the broker's website. Most of these fees are not hidden if customers take the time to read the fine print. Brokers like Fidelity and many others have an easy to read document on their site that lists all of the fees in plain English. It won't be nearly as interesting or informative as an Investopedia article but it's the best way to avoid fees you didn't plan for.