Mounting Brokerage Commissions….

I thought I’d give a little insight into what has happened in my industry with regards to fees and commissions over the last 15 years.

In short, the amount an advisor can make for managing money has generally gone way, way down. This is good for the public, and in my opinion it is just fair. In the days of brokerage commissions,  many clients were overcharged, so much so that commissions were a major impediment to families being able to make any decent money investing.

Here is what I mean

Let’s look at commissions for selling stock. This is the old school way it was done, and some accounts are still billed in this way. A typical commission for selling stock was 1 – 2%. Let’s go with the low end of this of 1% and further assume the broker turned over the client’s portfolio twice per year.  This isn’t very much. Certainly this wouldn’t be considered “churning” or anything that would raise a red flag.

Remember the broker gets commissions on the buy and sell side, so each time stock is bought and sold, there are really two commissions.  If this is done twice a year with the total portfolio, you get fees that equate to 4% of the total account value. This means that with a mere $5,000,000 of assets under management, a broker in this model could easily generate $200,000 of gross revenue.

4%!!! That is basically the total risk premium that investors expect long term for holding stocks over bonds.

I say this to warn those investors out there who still might be buying and selling stocks on commission. It is really easy for those commissions to add up to a big number – so big that it basically eats up all the returns stocks have historically provided over bonds.

 Photo by Liz West

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