Comparing brokers
The order fee in the advert is often the smallest part of your costs. What matters are the spread, trading venues, foreign currency fees and whether savings plans are free.
Learning objective: After this lesson you can compare two brokers by the costs that really count, not just by the advertised order fee.
Zero euros per order sounds unbeatable. But every provider wants to make money, and if not from the order fee, then somewhere else. Usually from the spread or from payments by the trading venue.
Which Questions Matter
Compare these questions instead: does a savings plan cost anything? Which trading venues can you choose? What does buying in a foreign currency cost? Is there a custody fee? And what does it cost to move your portfolio to another provider later?
The Forgotten Question
Almost everyone forgets the last question. If switching is expensive or awkward, you're stuck, even if the provider gets worse later.
What Is Enough in the End
For most people it comes down to this: free savings plans on broad ETFs, no custody fee, a reputable provider. Everything beyond that is fine tuning. If Nora saves €200 a month instead of €150, that does more for her than the cheapest broker in the world.
Your trading costs have two parts. The visible ones are order fees and third party charges. The invisible ones are the spread and whether your order moves the price against you. With small orders the invisible part is often bigger. So anyone who only compares order fees regularly gets it wrong.
Conflict of Interest in Execution
If the trading venue pays the broker for sending it orders, there's a conflict of interest over where your order is executed. Brokers are legally required to ensure best execution and must publish their rules for it. You can check it yourself by comparing your execution price with the price on a major exchange in the same minute.
Ongoing Costs
If you invest for the long term, ongoing costs matter more than costs per order. A custody fee or a charge for converting every dividend into euros hits your whole holding, year after year. Because the holding grows, these costs grow with it, just like compound interest, only against you.
Summary
- With small orders the spread usually costs more than the order fee.
- Check what moving your portfolio to another provider costs.
- Ongoing costs hit your whole holding, costs per order only the order.
Did you get it?
Why isn't a zero order fee automatically cheap?
Because the costs are then usually hidden in the spread or in payments from the trading venue.
Which costs weigh most for long term investors?
Ongoing costs such as custody fees, because they apply to the whole growing holding.
Why does the price of moving your portfolio matter?
Because it decides how freely you can switch later.
Check your understanding
Your task
Get the price list from two providers that interest you and enter their terms, with your own planned savings amount, into the broker cost calculator. Note which item adds up to the most over twenty years. Also write down what moving your account would cost at each of the two.
Sources and further reading
- Section 82 of the German Securities Trading Act (WpHG) on best execution of client orders, which obliges brokers to maintain and publish an execution policy. View source ↗
Related
- Every fee that eats into your returnStage 2
- Understanding the trading interfaceStage 2
- Currency riskStage 2
- Matching questions for this stageQuestions