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How much do stockbrokers make? Where do they get their money? The answers could have implications for your investments!
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Unless you have a huge amount of money invested in the market and you'remaking your own trades, you probably use a stock broker—hopefully a discount broker. Why does thatmatter? Because the incentives in place for a traditional broker might workagainst your own interests.
What Does a Stockbroker Do?
A stockbroker has specific legalrequirements and duties. The most important is helping individuals buy andsell financial instruments such as stocks, bonds, and derivatives.
You probably pay a flat rate per transaction with your broker. Hopefullyyou're paying $10 or less. Your broker has to do some work to mediate thesetransactions, but you're paying them for work you could do yourself with an online discount broker.
Every dollar you pay someone to do work that you could do (and probablyfaster) is a dollar that's not earning money for you.
In the olden days, unscrupulous brokers made lots of trades on behalf oftheir customers, churning theiraccounts to generate more commissions. This is unethical and illegal. You'renot likely to find this happening at a reputable brokerage, but it onlyhighlights the fact that thereward structure of Wall Street has its agenda aligned strongly againstyours.
What do stock brokers and investment brokers do? That depends what you'repaying for. Whether you know it or not, you're paying forsomething.
What Kind of Salary does a Stockbroker Make?
According to the US Bureau of LaborStatistics, the medianincome for a stockbroker was $64,120 in 2018. (This is down from $71,720 in2012). Because this is a median value, half of all brokers make more than thisamount and half make less.
Some Wall Street traders make make millions of dollars, but they're rarerthan you think. Salaries depend on experience and geography. Brokers working inNew York City will make more than brokers working in the Midwest, for example.The top10% of brokers in New York City can make over $300,000 annually. Thepotential is unlimited at the tippiest of the top, if they deliver largeamounts of profits to their investors.
Brokers make their money in several different ways, but their money mostlycomes from you.
Broker Fees
Want a report on a stock you heard about? Want a tip on a new ETF? Every time you call your broker foradvice, get out your wallet.
It's okay to pay someone to help you do research or to do something youdon't have the time or skill to do on your own, but consider what you get foryour money. If it's worth $50 not to do a few minutes of research on your own(and remember, you still have to read and understand whatever your broker sendsyou), it's worth it—as long as you understand what you're buyingbefore you invest.
Referral Bonuses
Sometimes brokerages and other companies want to encourage investors to buyinto specific investments, especially mutual funds. They'll offer brokersreferral fees to sign up new investors. Sometimes these funds are good deals.Other times, they aren't. If you're not careful, your broker might pressureyou into buying something you wouldn't normally invest in just to get theirbonus.
Commissions
According to the PayScalestock broker survey, the largest source of wages in this profession (andthe source with the largest range of variance) is commissions. As with manysales professions, with experience and promotions, salary often becomes anegligible component of total compensation—the better the broker, themore in commissions he or she expects to receive. Sometimes a stockbroker canmake a six figure salary from commissions alone.
Where does this money come from? You already know the answer; the more youtrade, the more you pay. Chasing the fluctuations of one stock or anothergenerates more and more fees and income for your broker. Even if your brokerisn't providing market-beating advice to you, you're still paying for theirtime.
When Should You Pay Broker Fees?
Should you pay for a full-service broker? It depends on the value you get!If you're getting good research and finding undervalued stocks that youcouldn't (or wouldn't) find on your own, fees might be reasonable. If you'regetting market-beatingreturns even after you take out a percentage of management expenses, itmight be worth it. You can learn how to do stock research and picking on yourown anyhow!
You don't have to accept every opportunity that comes your way from abroker. You don't have to accept any. But if you're not getting great advice,why are you paying for it? Most individual stockholders don't see amazingreturns. They pay handsomely every year for mediocre gains. (Ask yourself "howmuch does a stock broker earn from me?" and compare that to how much he or shemakes for you.)
You're often better off buying something with very low fees, such as the . Until you'reconfident enough to evaluate investments to see if you're getting the valueyou're paying for, stick with something with proven value and low costs. (SeeThe Little Book of Common Sense Investing for moredetails.)
If you're content to make a few trades per year and comfortable doingresearch on your own, a discount broker will give you a lot of what you needfor low per-transaction fees, with the option to pay more for personal adviceonly if you want it. If you're reading this, you know you don't even need abroker to buy and sell stocks, much less to do your research for you.
Take control of your investments. Save a few dollars on every trade. Putmore of your money to work for you, and it will pay off.
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