Know the Truth About Fixed-Fee Accounts

September 16, 2008
Ed Rabinowitz

Physician's Money Digest, June15 2003, Volume 10, Issue 11

Express-Times

If you do a considerable amount ofstock buying and selling, you're wellaware that broker commissions can eataway, sometimes significantly, at yourprofit level. At the very least, they canadd up. As an article in the notes, if you use a traditional full-servicebroker, you could pay hundreds of dollarsin commission fees for trades thattotal only a few thousand dollars.

Fixed-fee warning:

These extra fees can make breakingeven a challenge. Of course, you couldopt to work through a discount brokerwhere you may only pay $5 or $10 pertrade, but just like selling a home withouta real estate agent, you're on yourown with no one to rely on for investmentadvice. Or, you could utilize afixed-fee account at a full-service brokerage.While thereare benefits to be realized, there arealso potential pitfalls.

FIXED-FEE ACCOUNT FACTS

Fixed-fee accounts have been growingin popularity. According to a surveyof 341 brokerages by Weiss Ratings(www.weissratings.com), 171 currentlyoffer fixed-fee accounts—almost twiceas many as a year ago. Fixed-feeaccounts appeal to both active investorswho are tired of paying high commissionsand full-service brokerages thatcan use them to retain active investorswho might otherwise opt to use discountbrokers.

Fixed-fee accounts may vary by namedepending on who's offering them, butthey all work similarly. Rather than pay acommission on each trade you make, youpay an annual fee that's figured as a percentageof your total account. The annualfee can vary, and is generally larger forsmaller accounts. However, the feeapplies against everything in an investor'saccount, including long-termholdings on which there are no trades.

Does a fixed-fee account make sensefor you? Let's consider the averageaccount, according to Weiss Ratings. Aninvestor with a $100,000 account, payingan annual fee of $1500, would have tomake more than 15 trades a year tocome out ahead. For an investor with arelatively small $100,000 account, 15trades a year are a lot.

Now, if you're a do-it-yourself type ofinvestor and can make trades for only$15 through a discount broker, youwould have to make more than 100trades in a fixed-fee account before youwould start saving any money againstthe $1500 annual fee. If you assume thatof your 100 trades, half were buy ordersand half were sell orders, you wouldhave to identify 50 promising investmentseach year. Most average investorsdo not have the time or the expertise toperform that level of research. You needto consider your own investing situationbefore making a hasty decision.

BENEFITS AND ADVISORS

There are, of course, benefits to fixed-feeaccounts, especially if you're anactive trader with a fairly large account.In this case, a fixed-fee account willallow you to do all the trading you wantwithout having to keep an eye on all thecommissions you're paying, and you'llstill receive advice from a professional.

However, if you decide to go theroute of a fixed-fee account, be sureyou understand what you're going toget for your money. For example, willyour advisor offer diversified advicethat takes into account all of yourneeds, such as your tax situation, long-termfinancial needs, and estate planning?Or will your advisor simply be asalesperson with a fancy title?

Word to the wise:

As noted, many full-service brokerageshave taken to fixed-fee accounts.Some promote these accounts by sayingthey eliminate the conflict of interestinherent in traditional accounts. Butfixed-fee accounts can also lead to brokerlaziness. After all, the firm is going toearn a set fee from you no matter howoften you trade, so why do all the legworknecessary to find good investments?On the surface, fixed-fee accountsseem like an attractive alternative.Remember tolook below the surface before makingany commitments.