Broker Fee Scam – Should You Pay Broker Fees in Advance

It’s easy for a market newcomer to become entangled in a web of confusing service costs that only keep piling up with no apparent reason.

Various online charlatans and con artists rely on creating an atmosphere of confusion, be it by purposely obfuscating any cost-related information or omitting it entirely. Our article will discuss how real brokers charge their service and how to recognize a broker fee scam.

What Are Broker Fees?

Broker fees represent the main source of income for many online trading companies, and some fees cannot be avoided. However, they can significantly differ across platforms.

Online brokers require the lowest fees to be paid, especially compared to full-service brokers. Their primary role in the trading industry is to allow retail traders to participate in online financial markets. Besides profiting from commissions for their services and specific types of products, brokerages also make money from traders who invest on margin. These investors borrow money to trade so brokers can charge interest.

Many types of fees and interests exist in the online trading world, so let’s elaborate on the most common ones.

Types of Fees

Many fees can be avoided with the careful choice of a broker. For example, you can always look for a brokerage portal that doesn’t charge annual or inactivity fees.

Also, many established brokerage brands offer advanced trading software solutions for free. Various data and research commissions can also be avoided, as they are usually included in optional subscription plans.

However, there are standard fees that help the markets function. These cannot be avoided and are generally paid as a flat rate fee or are calculated as a percentage of the completed trade. Such charges come from the broker delivering their services and allowing you to trade online.

Commission

Trading broker fee is charged to investors that buy and sell a particular instrument, usually shares. The commissions allow the broker to earn compensation for their service, by allowing clients to trade on their server.

Such charges usually vary depending on the instrument traded. For example, most commonly traded financial products like currencies and stocks incur the lowest fees. Many of the countless online trading firms, especially renowned ones, have removed stock trading fees entirely. However, fees on other products like bonds and ETFs still apply.

Inactivity Fees

Costs of maintaining idle accounts can sometimes pose an expense on a brokerage firm. They apply to all those accounts that have not been executing any trades for a prolonged period of time or have not displayed the minimum trading activity.

The fee is billed after a certain period of inactivity, which can be weeks, months or years depending on the broker. Brokers may charge these as recurring fees on a monthly, quarterly or a yearly scale. Some leading firms do not charge these fees, which makes them attractive for long term investment.

Spreads

Spreads are an umbrella term in finance, and relates to a gap which exists between two prices, yields or rates. When it comes to online brokers and their costs, it is related specifically to the difference between a bid price and a call price (a bid-ask spread).

As such, spreads are one of the main trading costs, as they define the brokers’ profit margin for each trade per order. When choosing a broker, you’d want to carefully compare the spreads and commission costs.

Depending on whether you wish to be a high-volume trader with a relatively small number of orders or a day trader who executes rapid trades in quick succession, you will favor lower commissions or lower spreads, respectively.

Withdrawal Fees

The vast majority of online brokers today do not charge fees for deposits. However, a big portion still charges a payout fee, which differs depending on the amount and the withdrawal method chosen.

Most legitimate platforms do not charge fees for popular transaction methods like cryptocurrencies and checks, but wire transfers are usually charged. These are not the same fees that your bank also charges, so be aware that you may encounter additional expenses.

Some of these fees are fixed. For example, a broker may charge a default $30 withdrawal fee while others calculate the commission in percentages. Industry-leading companies allow a certain number of free withdrawals each month, so that’s one convenient circumstance to look for in a broker.

Conversion Fees

This cost is billed when one currency needs to be converted into another. Currency conversion can happen either when clients trade or when they wish to deposit/withdraw a sum from their trading account.

It can happen automatically when you have a EUR cash account, for example, and you wish to buy a US share like Amazon. Some Forex providers allow their clientele to manually perform a conversion before they open positions, which has proven to be more cost-efficient.

This sort of fee also occurs when a client wishes to fund their live account with US dollars but does so from their EUR bank account. Your broker-dealer charges you for converting the currencies before the transfer completes. Opening sub-accounts in different currencies helps reduce costs, which can substantially decrease your capital in the long run.

Management Fees

Investors who have their accounts professionally managed are subject to management fees. Professional account administrators require this fee for their efforts to maintain your portfolio.

Having one’s assets professionally handled is often not cheap, as it requires the engagement of expert portfolio managers’ expertise. They can select and manage assets and investment products based on your goals and funds available.

There’s a significant difference in how much these fees are charged, depending on what is required from the account manager and what investment method is used. The more active professional handler has to be, the higher they charge for their services.

How Are Broker Fees Normally Paid?

Depending on the type of fee, you can expect various charging methods. Commissions and spreads are charged automatically when a position is opened or closed. Swaps are charged as an overnight fee for open positions.

Platform fees or inactivity fees are recurring payments which are processed once a certain threshold is reached. Some brokers include a deposit and a withdrawal fee, paid each time an account balance is topped up or withdrawn from.

All of these costs are billed directly to the trading account balance. Traders should beware of advance fee fraud, in which the charlatans require additional payments in order to allegedly perform a service at a later time.

Should I Pay Broker Fees?

Without charging any fees for their services, the brokers would simply not be able to turn a profit. Thus, fees are an important part of the financial ecosystem, as they allow the global markets to function unobstructed.

With that in mind, you should always be suspicious about any company or individual that does not make a full disclosure of their fees. Online con artists often use hidden costs as a part of their trading fee scam.