Come the New Year, there are many unknowns about what our financial markets will have in store for us given the looming fiscal cliff. There's a lot that you don't know -- but what about what you do know? If you're among the 17 million investors using accounts at the popular online brokers Schwab, TD Ameritrade, and E-trade, you are collectively throwing away over $1.8 billion a year in unnecessary fees, according to a recent NerdWallet study.
So when you ring in the New Year this January 2013, do yourself a favor by resolving to do better -- you can beat these numbers in order to avoid unnecessary fees while investing.
How to begin? For starters, it's important to know that not all online brokers are created equal. As you're cashing in your holiday gifts and bonus checks, make a pledge to yourself that you'll shop around for the best online brokerage account for your needs before opening up just any account.
Here are the three key facts to keep in mind as you go about as you adopt this financially savvy New Year's resolution:
1. Extra Costs Don't Guarantee Better Results
Customers might assume they are getting better service and trade execution at the higher price point offered by big name brand brokers, but that isn't always the case. NerdWallet investigated the popular online brokers to find that for the features and services most investors need, they could get them elsewhere more affordably. Do higher commissions imply faster trade execution? Not necessarily. TD Ameritrade and Scottrade use Knight, Citadel, and Citigroup for execution services -- but so do discount brokerage accounts TradeKing and Cobra Trading.
While the levels of customer service may vary from brokerage to brokerage, they are all subjected to the same regulations. All online brokerages available to U.S. investors must be registered with the SEC, as well as members of both FINRA and the SIPC.
2. Commission Is Being Funneled to Advertising and General Expenses Instead
Instead, these extra costs you're paying at top brokerages are going to things like advertising and overhead expenses. For instance, the three largest online brokers -- Schwab, E-trade and TD Ameritrade -- spend 88 percent of your commission fees on non-execution expenses.
Among these big three, only 12 percent goes toward trade execution, while approximately the same amount (11 percent) is spent on their advertising. In comparison, discount brokerages Interactive Brokers and Speed Trader spent an average of 59 percent on trade execution, with just 7 percent going to advertising and general expenses.
3. Transferring Your Money To a New Account Can Pay For Itself
The typical investor with these major brokerages places fewer than 2 trades per month and would be better served taking his or her business elsewhere -- but most brokers charge a transfer fee for those who decide to take their money somewhere else. These Account Transfer Fees (ACAT Fees) generally range from $50 to $100.
While these fees can be hefty, it is still worth doing the math to see if you'd be better off trading elsewhere. For instance, if you switch to even a mid-priced broker you could save over $5 per trade, so even with an ACAT fee of $100 it would pay for itself after just 20 trades.
Getting Started With Your New Year's Resolution
Come 2013, it's a simple resolution: do the research first so you can pick the right account. Just as you would house hunt or shop around at the grocery store, so should you compare and contrast your options to find the right fit brokerage account for you.
Ready to begin the hunt? NerdWallet's new brokerage comparison tool allows investors to search for what matters to them and compare total costs across all 74 online brokerage available to retail investors looking to open new brokerage accounts.