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Is Your Stock Broker Quietly Ripping You Off?

The online stock brokerage industry has become fiercely competitive in recent years, which is all to the good for traders. Competition has led to plummeting prices, new features, and better service overall. Unfortunately, it has also led to some less-than-desirable business practices by some of the larger brokerages.

Hidden fees, confusing commission schedules, misleading advertising, ever-changing policies, shifting margin rates, poor executions, conflicts of interest in order routing, "snapping up" stop-loss orders, making markets with excessive spread sizes ? these are just a few of the ways stock brokers can take money from your pocket and put it into their own, and individual traders are most often none-the-wiser.

The Old Bait and Switch

The most common example by far is misleading advertising. Run a Google search for anything related to trading, and chances are you'll see lots of ads from various stock brokers touting their low commissions. Better read the fine print before signing up, however.

Take Etrade, for example. They have flooded the Web with ads proclaiming $6.99 stock trades. Of course, nowhere in these advertisements does it mention exactly what one must do to qualify for this commission level. That information is buried on a difficult-to-find page on Etrade's Web site. If you do manage to hunt it down, you'll discover that in order to get that rate, you need to make 1500 trades per quarter. You read that right ? one-thousand-five-hundred trades. That's an average of over 12 trades every single day. Even at their lowest commission level, that will run you $84 per day, or a whopping $2,500 per month.

Even their second-tier rate of $9.99 requires a $50,000 minimum balance. Otherwise you must pay their standard commission of $12.99, which is quite high by current standards for online discount brokers. Even at $9.99, Etrade's commission is twice as much as the rate offered by several other brokers with no minimum balance at all.

You'll have to dig even further through the fine print to discover their many hidden fees, such as its $40 quarterly "account service fee," its low balance fee, and its inactivity fee. Their shiny, attractive-looking advertisements neglect to mention these as well. Rest assured that your billing statements will not, however.

All too Commonplace

Regrettably, Etrade is hardly the only brokerage to engage in these sorts of practices. Bank of America Brokerage advertises its "free" stock trading program heavily, but you'll have to dig through the fine print to learn that you must have $25,000 in BOFA's deposit accounts (i.e. checking or savings, not your brokerage account) in order to get them. Naturally, these deposit accounts pay some of the worst interest rates in the entire banking industry.

Other examples abound. Typically, the larger companies are the worst offenders. Faced with an ever-growing crop of smaller, more efficient competitors offering better and better service at rates the big boys simply can't match, they have turned to attempting to pull the wool over your eyes. Don't fall for it.

Word to the Wise

Be sure to investigate the terms and conditions extremely thoroughly before you sign up for any brokerage account. The better outfits are up-front about their conditions and limitations. If there is even a single asterisk on any of their advertising materials, watch out! An asterisk means "we really hope you don't read this, but our lawyers made us put it here." Any time a brokerage hopes you don't read something, it's best to disappoint them.

This applies doubly for smaller investors. For a small account, paying too much in commissions can easily turn a winning year into a losing year. Lastly, repeat this mantra to yourself: Big companies are for big accounts. If you have less than $100,000 to invest, you'd be far better served at a small, independent brokerage which is focused on serving investors like you.

You can get the lowdown on a wide variety of Online Stock Brokers at http://www.BrokeBrokers.com. Jack Brynaur is an attorney and published financial author. His analysis has been featured by Forbes, Seeking Alpha, Yahoo! Finance, the Huffington Post, and numerous other financial and academic sites.

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