10 Questions To Ask Your Broker – Part 1
Don’t Listen To Me, But Please, Hear Me Out: # 15
Shaheeda Abdul Kader, Aug 12 2020
It’s hard not to feel FOMO (Fear Of Missing Out), when Robinhood Trading app is always in the news and apparently making young traders very rich overnight. However, all may not be as rosy as it looks, as unfortunately people tend to talk up their wins and be silent about their losses.
Sad and Cautionary Tale
In a most tragic case, a Alex Kearns, a 20 year old young man died by suicide (must read, see resource link at the bottom of the blog) because his Robinhood app showed that he had a negative balance of ($730,000) in his account. Its even more tragic because Kearns was trading on margin as well as doing sophisticated trades like short selling, and options trading (puts/calls) without understanding what he was doing. This tragedy made me very angry and terrified. Reality is that Robinhood’s User Interface and logic was really shitty, excuse my language. I won’t go into details, but Alex did not have losses anywhere close to ($730,000), in fact he had a positive balance of $16,000. It is very important you know what you are doing while using trading platforms, as well as know how to read your portfolio statements correctly.
How To Protect Yourself From Your Broker
Ever since the sad demise of Kearns, I’ve been thinking about trading platforms and how to make sure investors are protected. I researched a few brokerages and online platforms. I’ll do a 2 part blog on my findings. In this Part 1, I discuss the questions you must ask your brokerage or platform before enrolling.
I am focused on straightforward buying and selling of Stocks, ETF’s and Mutual Funds WITHOUT leverage. This blog is NOT for day traders. I advise 99% of us NOT to pursue day trading, leveraged or margin trades, options trading, derivatives trading, swing trading, or short selling.
Questions to Ask Your Brokerage Firm or Trading Platform
Before enrolling or investing in any brokerage firm or online platforms, please take the time to read everything on their website and better, still call them and speak to them.
- Eligibility: Some platforms may not allow citizens of certain nations to enroll. For example, ADSS is a UAE based brokerage firm that does not allow US citizens or US residents to enroll.
- Fees: Ask as many times as you need to about fees. Keep asking them, “Am I forgetting to ask about any fees? Are there any other fees I should be aware of, that I have not asked about?” They have to tell you everything.
- Are there brokerage fees or management fees?
- If yes, how much is it and how is it calculated? For example, they may say 1% of total assets in your portfolio. So for example, if you have some stocks, bonds, ETF’s and cash in your portfolio and it is worth let’s say $100,000 on Dec 31 2020, they would charge you $100 in fees.
- How often are fees charged? Sometimes the firm may charge quarterly or half- yearly or annually. Always ask them to illustrate it with an example.
- There is a difference between Fund Management Fee, (which you may pay when you buy a mutual fund), and a brokerage or platform management fee.
- Minimum Balance
- Some brokerages or platforms may require you to start with a minimum investment amount and/or maintain a minimum balance. ETORO requires a $200 minimum starting amount whereas Saxo Bank requires $10,000 starting balance.
- Are there withdrawal fees?
- Say your portfolio value is $100,000 and $20,000 of it is in cash. Let’s say you want to withdraw $10,000 in cash. Brokerage firms may charge anywhere from $0 to $100 or more in withdrawal fees.
- What currencies are available on the platform?
- For example, ETORO in UAE as well as ADSS only allows trades in USD. There are others that may allow you to buy and sell stocks in multiple currencies.
- What are currency exchange fees?
- If you send money in Sterling pounds for example and you need to convert in USD to buy US stocks, ask if the platform charges extra for these. Some platforms may charge $2 per transaction plus the exchange rate spread. You just need to feel comfortable that these are not so exorbitant that it will significantly erode your gains from investments.
- Deposit Fees
- Some platforms charge fees to accept your deposit when you fund the account. For example, Mena Corp charges $60 to take your deposit. So if you transfer $1000, your account in Mena Corp will reflect $940
- ETORO does not charge any commissions for buying or selling stocks or ETF’s. However, behind the scenes they are probably taking spreads (defined in part 2 or Blog #16). Why? Because Etoro is not a market maker an does not purchase from the Stock Exchange like NYSE or NASDAQ directly. They purchase shares from another broker like International Brokers.
- IG Markets, Mena Corp charge between $15 to $25 minimum per trade and/or a percent of the trade volume or number of shares bought or sold. For example, Mena Corp charges $0.02 per share. So, if you buy 2,000 shares, you would pay $40 for that purchase in commission. You’d pay higher of the two fees, the minimum fee of $25 per trade or $40 in this case. These are really too high.
- Please note that many platforms do not offer Mutual Funds. Mutual fund fees can be high. Some charge almost $30 per trade on MF’s.
- Inactivity Fee
- Some brokerages will charge you a fee if your account is inactive for a certain period of time. Interactive Brokers charges such a fee.
- Are there brokerage fees or management fees?
- Who is the custodian bank for the brokerage?
- This is very critical. For example, ADSS has ENBD as the custodian bank and ETORO uses the National Australian Bank for UAE customers. This is very important because you want to make sure your money is held in a trusted, reputable bank and in a country with great regulation and consumer protection.
- Who issued licenses for the firm or platform?
- For example, Etoro has 2 Tier 1 licenses (most trusted) and 1 Tier 2 License (average trust) from the UK, Australia and Cyprus. When I spoke to ETORO, they mentioned that they recently got the license in USA (Tier 1), but it has not been updated on their site. ADSS is regulated by the Central Bank of UAE.
- In case of a dispute, where is the jurisdiction?
- Please take the time to question them on dispute resolution process and jurisdiction. It’s your hard-earned money and you should feel secure.
- If everything goes pear shaped and let’s say your brokerage firm goes bankrupt or is mired in a scandal, what happens to your assets? So long as the Custodian Bank is secure, you should be ok. Ask what insurance cover they provide against unforeseen circumstances. Always keep all your portfolio statements safely.
- Do they offer a checking account?
- Some brokerage firms offer checking account services. For example, Charles Schwab offers both a credit card and checking services in USA. This could be very handy. It’s not a must, but a nice feature if your brokerage provides it.
- Ask if there is an auto-reinvest dividend option. I highly recommend you reinvest dividends especially in stocks, funds or ETF’s unless you need the income. Unfortunately, most online trading platforms will not automatically reinvest dividends. You would have to do it yourself and may or may not incur trading/transaction fees to do so.
- Charles Schwab for example, has a very simple option to automatically reinvest dividends. Etoro, will not reinvest dividends.
- How many markets and stocks are there in your platform?
- Unless the platform is a market maker like Charles Schwab or International Brokers, the access to stocks and ETF’s would be limited in most platforms or brokerage firms.
- For example, ETORO has access to only 1,000 stocks. US market has over 3,000 stocks. ADSS informed that they only list the most traded stocks. I could not find the recent IPO stocks like Ncino Inc, Jamf Pro or Big Commerce in either platforms. But they may update and add more stocks every month. I found Lemonade, a recent IPO in ETORO but not in ADSS.
- You also want to ask what markets they cover such as US, UK, Hong Kong, Australia, China etc., so that if you want to buy stocks from the Shanghai Stock Exchange, for example, you are able to do so.
- As I mentioned earlier, a lot of platforms do not offer Mutual Funds. The good thing about MF’s is that, dividends are reinvested automatically. ETF’s do not reinvest dividends and they are paid out to you as it happens. For tax planning, and compounding of your investments, it is better to reinvest the dividends.
- Tax implications
- Not a single brokerage firm I contacted was able to answer this adequately for me. So, please note, if you trade US stocks for example, the platform like Etoro, will deduct taxes from dividends at 30% before crediting your account. They may not deduct taxes from trading gains. You will also be asked to provide a W-8 form indication you are not a US resident or citizen when you invest in US stocks. I’m assuming similar tax provisions may be there when you buy or sell Australian stocks or European stocks etc.
You work very hard for your income, so you must invest at least 2 hours investigating your brokerage firm or online trading platform before trusting your money with them.
- Go for a platform or broker that has zero to least possible fees
- Tier 1 Licenses
- Excellent, world renowned Custodian bank
- Accepts your home currency or offers fair exchange rates
I recommend you read my blog on which brokerage to choose. I compared several brokerage and platforms so you don’t have to.
Click here to see articles and other resources used for this blog.
If you would like to understand more, please feel free to reach me, on Twitter @saq3 or LinkedIn @Shaheeda Abdul Kader, or leave a message at email@example.com. I’d be happy to offer you my services. Please do check my other blogs here.
I am NOT a certified broker or financial advisor. Please DO NOT make investment decisions based solely on my blogs. My intention is to show you how to research stocks or funds for yourself so you can feel empowered and knowledgeable to do your own investigations and invest with confidence. It is best to consult with your broker or advisor if you have questions. You can also reach me and I’ll do my best to help you with your queries.