Consideration One: Commissions are not quite as important as you think they are.
Consideration Two: Flat Fee Commission arrangements are different from Wrap Accounts, providing a practical way to change a large variable cost into a smaller fixed cost... in many instances, depending on trading volume. In Wrap Accounts, management and brokerage costs are combined and the difference between the two is no longer discernable.
Consideration Three: The Day Limit Order saves the really big bucks... it's a matter of smart buying, and even smarter selling.
Consideration Four: Pay-as-you-go commissions become part of a transaction and can be dealt with in buy and sell order prices. Commissions that are turned into fees are simply needless withdrawals from portfolios.
Consideration Five: Flat Fee Commissions require an "uninvestable" reserve to assure the availability of funds to pay the fees.
Nothing in the Investment World is misunderstood more than the impact of commissions. Since Charles Schwab first shocked Wall Street by offering discount commission rates, a new industry has developed with a huge, cult like, following of investors. Investment Managers are often called upon to explain why they prefer to operate using full service firms as, I’m told, most independent managers do. Many of you may even stop reading when I utter my blasphemous opinion that commissions are simply a variable cost of Portfolio Management and not something to get particularly stressed about.
- In order to construct a properly diversified portfolio from scratch, you have to pick and choose many different securities to attain the proper balance and diversification. If the relationship is in the six figure area, arrangements can generally be made to reduce the impact of start up costs even at the most expensive of full service brokerage firms.
- Although there are serious benefits working with larger, well known firms, the key issue is the relationship you develop with your account executive. He or she is there to help you plan and implement your program. They are trained to deal with individual securities, and should understand them as well as they do mutual funds... but remember, this needs to be your program so you may have to steer them in the individual security direction. Your financial advisor needs to impress you with a knowledge of securities, markets, and the fundamentals of investing like those that you have been introduced to around this website.
- Actually, if you read the fine print in several discount brokers client agreements, you will learn that there are firms out there that tell you up front that they have no intention of making any effort to obtain Best Execution for their clients. So, in effect, you may pay a lower commission but a higher price for the security. Who wins?
Contrary to popular belief, successful investing requires the conscious coordination of two sets of well-documented principles, not just the placement of securities orders in one medium or another, or at high or low commission rates. These principles are the Quality, Diversification, and Income (QDI) tenets of Investments 101, and the Planning, Leading, Organizing, and Controlling (PLOC) basics crammed into the brains of all Sophomore Management students.
As every experienced Manager knows, it is the fixed costs of an operation that require tight control, and the variable costs that require creative direction.
- There are few Fixed Costs in Investing. Investment Management Fees are one, Flat Fee Commissions would be another.
- Variable Expenses are directly related to buying and selling the securities in the portfolio. Theoretically, variable costs are zero if there is no activity.
Click for Details -->
Commissions - Part 2 <--
