Commissions, Fees, and Brokers

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Image source: https://seekingalpha.com/article/4052114-spy-ing-401-k-much-contribute

Sorry Schwab, I had to share this story for my blog viewers. If I can manage to successfully negotiate a lower commission rate from the cheapest high-end brokerage firm in the U.S., you can too.  

I open up the live chat through the Schwab website and the conversation goes something like this:

Me: Hi (insert name of representative), I’ve been a loyal customer for the last 6 months and really love your platform and customer service. Although you already offer the cheapest commissions out of the high-end brokerage firms in the U.S., I was wondering if you could reduce my commissions. I’ve made over 200 trades roundhouse trades in less than six months, which is $2000 in commissions. If I trade with you for the next 20 years, that’s a lot of money. Since my account size isn’t substantial yet, I was thinking of switching over to Interactive Brokers, where I would be charged $1-2 per trade.

Once I mention that I’m a loyal customer who’s made a large number of trades and might leave, they try everything they can to get me to stay. What was the end result? I got a drastically reduced commission rate. I’m happy, and they are happy because I’m happy. Everyone wins (including my wallet)!


 

Commissions and fees add up quickly. Let’s look at an example:

Suppose trader A and trader B both start with a $50,000 account and begin trading. The only difference is that trader A pays $5 per trade while trader B pays $7 per trade.

At the end of the first year, trader A and B both made 20% returns on their initial $50,000 before commissions have been paid. They each made 1000 trades that year.

Trader A ends up with an account worth $55,000.

Trader B ends up with an account worth $53,000.

Notice that trader B ended up with $2,000 less at the end of the year. That is about 3.5% less than trader A. If you understand the power of compounding interest, over many years, trader A will have significantly more money than trader B.

Commissions could be the difference between whether you end up being a successful trader or not. As a trader, you are already competing against computer algorithms, professional traders, hedge funds, big banks, and your emotions, so why make it any harder on yourself by paying more commission fees than you need to?

Key Takeaway: Have a chat with your broker and see if you can get a reduced commission rate. If you are a day trader and make lots of trades, please consider how much money you can save. Compounding interest is not something to scoff at.

If you don’t ask, you don’t get!