Sometimes, fees and other costs of brokerage firms can quickly erode your returns and even eat into your principal funds. So read the fine print before signing up for an account with the firm
You can buy or sell financial securities such as shares, mutual funds and bonds through your broking firm. Brokerage firms make money by charging buyers and sellers every time they execute a transaction, and by charging other administrative fees like account maintenance fees, etc. Many investors assume that there is no difference between one broking firm and another, but this is not true. Identifying a right broking firm is an important task. Here are certain basic pointers that you must consider while choosing a broking firm.
Commission and fees
Before opening an account with a broking firm, you should read their schedule of fees and charges to understand how and when you will be charged. It is important to note that sometimes, fees and other costs can quickly erode your returns and could even eat into your principal funds. It is a good idea to estimate how much you will be investing and how often you will be buying or selling in a year. This will help you to estimate your annual fees across broking firms to make comparison easier. Thanks to stiff competition, the cost of investing nowadays is lower than ever. In certain broking firms, you need not pay commission to trade in shares, ETFs, mutual funds, etc. Instead, you pay a fixed sum as an annual fee.
Check for minimum trades
Ask your broking firm if there a clause or subclause about minimum trades that you will have to do and if there is any penalty for not complying with the requirement. Generally, banks offer something known as three-in-one accounts, i.e., savings bank, demat and trading account. Sometimes, the bank may insist on maintaining a certain minimum balance.
Any brokerage firm is worth its salt only when investors are being offered a wide array of investments to choose from. Some firms go further by providing deep rosters of high-quality investments that investors can get cheap. Most of the brokerage firms are moving away from the traditional brokerage business account to something new called the asset management account. If you are one who does not like paperwork and prefers to have everything in one single statement, then asset management account could be a better choice for you. For the above service, you need to pay a flat, small percentage of your account value instead of a regular commission.
Research report and advice
Check whether the broking firms offers investment research reports related to specific investments or trends in the market which is an important resource for investors. Also check for the quality and price, if it is not free. Some brokerages offer other services such as online trading, mobile app facility, debit card services and portfolio diversification advice. However, many of these services offered have conditions like an initial deposit amount or restrictions on withdrawals. Before signing up for these services, read the fine print and ensure that you are eligible for the offer and that you understand what it entails.
Nowadays, many broking houses are offering a great menu of services. The entire broking industry is moving towards replacing human intervention with chatbots, which is a piece of software that conducts a conversation via auditory or textual methods. However, elimination of human touch in financial services segment is relatively difficult. So, the best approach is to list out the facilities that you expect from your broker and choose accordingly.
The writer is a professor of finance & accounting, IIM Tiruchirappalli