Is a zero-commission broker really the cheapest? In Australia, brokerage fees are diverse, with some firms charging fixed amounts per trade and others charging a percentage.
Accounts on some platforms (e.g., Vantage) don’t even charge a commission to execute a trade, but add other trading and non-trading fees such as spreads, currency exchange fees, and overnight funding.
Choosing a broker that can minimise your brokerage fees can make or break your investment strategy.
I’ll tell you which to look out for while explaining why zero-commission brokers aren’t always the most cost-effective.
What Are Brokerage Fees?
Any brokerage charge that eats into your profits is a brokerage fee. Duh.
You’ll come across two fundamental types of investment and brokerage fees – trading and non-trading.
A. Trading Fees.
Brokerages make most of their profits through trading fees, so you can’t escape them. But some of them are more important (or nasty) than others.
If you’re not careful, trading fees can eat away a substantial chunk of your capital.
Commissions are the most common type of brokerage fee.
Most commissions typically range between $5 and $15 per trade, and they can be flat or calculated as a percentage of your trade volume (or a combination of both).
For example, here are three examples from brokerages operating in Australia:
|Selfwealth||$9.5 per trade, regardless of trade volume.|
|Webull||$4.9 per trade or 0.3% of trade volume, whichever is greater.|
|Saxo||0.06% of trade volume on trades up to $15,000 with a minimum brokerage fee of $6.99. The commission drops to 0.05% on trades above $15,000.|
|eToro||Zero commissions (on stocks and ETFs).|
When a brokerage advertises zero-commission fees, they generally charge higher fees on spreads.
The spread, also referred to as the bid-ask spread, is the difference between the buying price (bid) and selling price (ask) of a financial asset, such as a stock, forex, or cryptocurrency.
Think of it as a markup.
Online brokers and financial institutions profit from this markup when you buy or sell an asset or an instrument.
The lower the spreads, the better off you are.
Let’s say you’re looking at Tesla shares (because who hasn’t?), and the stock’s current market price is $250.00. However, when buying the stock through your investment app, you’ll notice it listed at $251.60.
Spread ($1.60) = selling price ($251.60) – buying price ($250.00).
You’ll pay an extra $1.60 in the example above to obtain each Tesla share.
Also, when you decide to sell your shares, you’ll receive slightly less than the market price due to the spread charge.
Spreads are incredibly difficult to measure and compare across trading platforms, so for the most accurate side-by-side analysis, consider setting up a couple of demo trading accounts to assess the differences between each.
“Pip” is an acronym for price interest point. A pip is the smallest unit price move that an exchange rate can make.
3. Overnight Fees.
The trickiest fee to understand is overnight funding, but this applies when you pay to hold a trading position overnight on leveraged trades.
It’s essentially an interest payment to cover the cost of using that leverage overnight.
So, how does an overnight funding fee apply to leveraged trades?
Let’s say you decide to open a long (buy) position on a CFD for a certain stock with a leverage of 5:1. The stock’s current price is $100 per share, and you want to buy 100 shares.
Without leverage, the total value of your position would be $100 * 100 shares = $10,000.
But with the 5:1 leverage, you only need to deposit 1/5th of the trade value, which is $10,000 / 5 = $2,000.
You’ll be charged an overnight funding fee on your leveraged position at the end of the trading day. That is, the remaining $8,000.
The overnight funding fee for each day is day = 0.02% * $8,000 = $1.60.
Sometimes, you may receive an overnight refund, resulting in a credit to your account instead of a debit.
Here are some of the overnight funding fees charged by the bigger trading platforms.
LIBOR (London Interbank Offered Rate – usually around 1.5%) – is the rate at which banks transact amongst themselves, and is added on top:
- eToro: 6.4% + LIBOR (!)
- CMC: 2.5% + LIBOR
That’s why you won’t find a specific amount quoted for an overnight funding fee until the time comes to execute a trade.
B. Non-Trading Fees.
In addition to trading fees, investors need to be aware of a range of non-trading fees.
I know… the list seems to keep growing. But once all the main ones are on your radar, at least you won’t be walking into investing blindfolded.
The following non-trading fees are much less complex, so stick with it. You’re almost there.
1. Withdrawal Fees.
Withdrawal fees are charged when you withdraw funds to your bank account.
Some brokerage firms may offer one free withdrawal per month, while others may charge a flat fee or a percentage of the withdrawal amount.
- CommSec charges a $10 fee for each electronic withdrawal from a CommSec account.
- IG charges a $15 fee for each international electronic withdrawal from an IG account.
- Selfwealth does not charge withdrawal fees to your bank account.
2. Inactivity Fees.
Inactivity fees are charged if you don’t make trades or carry out account activity within a specific period.
These range from a few dollars per month to several hundred dollars per year.
- CommSec charges a $10 monthly fee for inactive accounts (if there is no trading or other account activity for six months).
- Saxo Markets stings you with a $100 per quarter inactivity fee if there are no trades or other account activity. They want you to keep trading.
- Selfwealth does not charge inactivity fees. They’re OK with you buying and holding.
3. Deposit Fees & Currency Exchange Fees.
An exchange fee (or FX fee) is a simple enough concept to wrap your head around. When visiting a foreign country, have you ever converted your local currency into another?
It’s the same principle. Well, almost.
For example, eToro operates in USD, which means all Australians must convert their deposits from AUD to USD immediately.
You guessed it – eToro charges you a fee for this pleasure.
Remember that the same fees apply in reverse once you’re ready to withdraw your money back into your Australian bank account.
For comparison, here are some cheaper alternatives that include:
- SelfWealth: 0.6%
- Webull: 0%
4. Platform Subscription Fees.
Some trading platforms offer advanced or premium services that require a subscription fee. These are generally in addition to their standard accounts.
NabTrade, for example, offers the following paid subscription packages:
- Platinum: $19.95 or no charge if qualification met.
- Platinum + IRESS Trader/ViewPoint: $59.95 or no charge if qualification met.
- Morningstar Premium Research: $35.00.
These service packages include premium data and chart analytics, such as comparison, fundamental, trend, momentum, volume, events, personal transaction overlays, and a ‘What if’ scenario charting calculator.
5. Managed Fund (Mutual Funds) Fees.
Some trading platforms allow you to trade managed funds – also known as mutual funds – which gives you broader exposure to different asset classes.
They’re great if you only have a small budget but need to diversify to reduce investment risk.
Some managed funds examples are:
JPMorgan Emerging Markets Equity Fund.
- Initial charge: up to 5% of NAV
- Redemption fee: currently 0% (up to 0.5% of NAV)
- Management fee: 1.5%
Fidelity International Index Fund
- Management fee: 0.035%
How To Choose Between Online Trading Platforms And Apps.
With all those fees and charges in mind, it’s difficult to weigh up which is the best stock trading app for your needs. There’s a distinct lack of transparency in the industry.
You can’t always compare the fee structures side by side – especially spreads and exchange fees, because they fluctuate depending on the midmarket rate and the LIBOR rate.
So, you might be thinking, “Where the heck should I start?”
If so, good question…
The Pitfalls Of Zero-Commission Trading.
You might be surprised to hear this, but commission-free trading has drawbacks.
Without brokerage fees, the evidence shows that investors are tempted to trade more frequently, which ultimately leads to higher costs due to incurring spreads and currency conversion fees.
(Newsflash! It’s not really zero-commission.)
Zero-commission trading encourages impulsive trading behaviour.
It’s almost too easy to throw money at an attractive asset or pull the plug on one that’s underperforming, even when the long-term forecast is rosy.
Indeed, Warren. We happen to agree.
Making emotional and impulse decisions hinders a portfolio’s long-term success. And in the absence of a robust strategy, investors are vulnerable to their whims and fancies.
Full-Service Brokers Are Comparably Expensive.
At the opposite end of the spectrum, we have full-service brokers. They’re the traditional service most of us think of when we hear the word “stockbroker”…
Anyway, full-service brokers are Morgans, Goldman Sachs, Charles Schwab, and yes, the now-defunct Stratton Oakmont.
They provide high-level investment services and build tailored portfolios based on their clients’ requirements.
Due to the diversification of industry offerings with full-service brokers, comparing fees is like comparing apples and oranges.
As a general rule of thumb, a full-service broker tends to charge annual fees between 1% and 1.5% of total assets managed for a client in addition to charges per trade.
How Do I Know Which Broker Is Right For Me?
This is a complicated question with no easy answers, but I suggest you start by considering your trading patterns:
- Casual share traders who invest 5-10 times per year with a value of around $100 should look for cheaper percentage-based brokerage rates. A fixed commission of, say, $15 would represent a whopping 15% commission on a $100 trade – and don’t forget the commission on the sale, too. Double whammy!
- Professional traders who execute larger trades over $1,000 should seek fixed-price brokerage charges. A fixed fee of $7 represents only 0.07% of a $1,000 trade.
- High-net-worth individuals who invest more than $10m can negotiate discounts on trading fees on a case-by-case basis.
Before committing to any trading platform, you need to decide on your trading strategy.
For instance, some traders pursue a “scalping” strategy, profiting from small price changes and making a fast profit off reselling.
As Greek philosopher Senena said, “If a man knows not which port he sails, no wind is favourable.” Preach!
Ask yourself the following when deciding on your strategy:
- Do you want to be an active or passive investor?
- Do you want to be hands-on and execute day or swing trades?
- Do you see yourself eventually becoming a full-time investor?
- Do you prefer minimal solid, long-term investments that require little day-to-day interaction?
- What is the estimated trade value?
Insider Tips On How To Minimise Brokerage Fees.
Here are some strategies that you can use to save money and minimise fees.
Invest In Managed Funds.
Managed funds often cover trading commissions for investors, which is especially advantageous for smaller investors. You can gain exposure to dozens if not hundreds of assets with one single purchase.
You can consolidate with a managed fund or an ETF trade with Vanguard, and you’ll generally only pay a commission once and pay an annual management fee of between 0.1% to 3%.
With Vanguard, you never pay a commission when you buy and sell Vanguard mutual funds and ETFs in your Vanguard account.
Be sure to consider other factors like the fund’s objectives and recent performance to ensure the fund aligns with your goals and risk tolerance.
Overtrading is a slippery slope. It often occurs when a trader tries to make up for loss-making assets. In effect, this type of trading is not dissimilar to gambling.
Consolidating investments and trading in larger volumes less frequently reduces overall fees.
Setting Limit And Market Orders.
For many reasons, setting limit and market orders is good practice. It stops investors from price chasing and discourages impulsive trading.
But if you place large trade, you need to be mindful of partial fills.
A limit order will only execute when the price is within the defined range, and it may not always be possible to fill the entire order in one execution.
In the event of a partial fill, multiple orders must be placed, each attracting its commissions and fees.
Are Brokerage Fees Tax-Deductible?
Technically, yes – but as specified by the Australian Taxation Office, there are some details that you need to familiarise yourself with:
- You can’t claim a deduction for some costs related to purchasing your shares, such as brokerage fees and stamp duty.
- But you can include them in the cost base (cost of ownership, which you deduct from what you receive when you dispose of the shares) to work out your capital gain or loss.
Confusing, right? Ultimately, the costs can be deducted when the assets are sold.
Try not to get too overwhelmed with the terminology right now.
Most online brokerages keep a comprehensive history of your account activity and financial statements, but for ease of viewing and accessibility, consider updating a spreadsheet with details such as:
- Purchase date and trade value.
- Sale date and price (if applicable).
- Details of any non-assessable payments to you.
- Brokerage costs when buying and selling.
- Details of major trading events (e.g., share splits, share consolidations, capital returns, takeovers, mergers, demergers, and bonus share issues).
Final Word On Brokerage Fees In Australia.
When it comes to investing, I like to imagine that my investment portfolio is a leaky bucket…
No matter how much money (capital gains) is pouring in at the top, your pool will quickly drain if you don’t plug those leaky holes (fees).
See each fee as a different hole: spreads, conversion fees, commissions, overnight funding charges, and non-trading fees.
Just because you’re using a zero-commission broker doesn’t mean to say there aren’t other gaping holes in your bucket.
Broadly speaking, casual traders should look at cheaper percentage-based brokerage rates. Fixed commissions may be disproportionately high, whereas, to a professional trader, a fixed fee would represent a much lower proportion of the trade value and is easier to swallow.
Be relentless in your search for the best trading platform. Every dollar saved on fees can compound over time!
Frequently Asked Questions About Brokerage Fees.
Beginner traders and investors often wonder…
Can I Have More Than One Online Trading Account?
Yes, you can have multiple brokerage accounts with different brokerage firms. In fact, having multiple accounts for different strategies can be cost-effective.
You might, for example, opt for a zero-commission broker like eToro for purchasing low-value shares, and a Plus500 account is better for access to competitive spreads when trading forex and CFDs.
What Does A Robo-Adviser Do?
Unlike traditional investing, where you make your own decisions (not always based on logic and often biased), a robo-adviser uses algorithmic trading data to manage your investment portfolio with minimal human input.
But if you trust data science, a robo-adviser will make investment suggestions and even execute trades on your behalf in line with your strategic goals and risk tolerance.
HINs vs Custodians: Does It Matter?
When you open a brokerage account, you’ll be given either a Holder Identification Number (HIN) or a custodian account.
Both options are safe and secure, but a HIN offers more flexibility if you want to transfer your shares to another brokerage firm, for instance, if you find a provider with more competitive fees.
Can I Buy US Shares From Australia?
Of course! Trades for US shares from Australia are executed almost every second of the trading window.
You need to be aware of the currency exchange fees and any additional fees associated with buying and selling international shares.
Non-residents of the US have to complete a W-8BEN form to verify their country of residence for tax purposes.
Can Non-Residents Buy Shares On The Australian Securities Exchange (ASX)?
No specific restrictions prevent non-residents from participating in the Australian stock market.
Regarding taxes, if a non-resident lives in a tax treaty country, the withholding tax on profits is applied at a rate of 15%. For those living in a non-treaty country, the withholding tax is 30%.