moneySo you would like to know how these brokerage firms make their money. The short answer is: by getting you to open an account. Large brokerage firms know so many ways to make money off of your hard earned life’s work.

Here are some examples of how large brokerage firms earn fees.

1.  The most obvious is by charging commissions on trades. Please always be aware that it is in your brokers best interest to be recommending investments and investment strategies to generate commissions for the firm. As an investor you must always be aware of your broker’s motives and remember all commissions are negotiable.

2.  Most brokerage firms realize that investors eventually catch on to being churned by their brokers, so they have their brokers sell you on the merits of a Fee Based Account or a WRAP account. These accounts are a nice little annuity contract for the broker and the firm. A Fee Based account and a WRAP Account include a fee charged for handling the account, paid quarterly in advance, and generally costs between 1 1/4 % and 1 1/2 % of the value of the assets in the account. These accounts allow for a much lower commission rate on subsequent trades made. As an investor be very skeptical of these accounts and make sure that your broker/ advisor puts in writing how these accounts will benefit you more than the firm.

3.  Margin accounts are another way firms make money. By encouraging investors to use margin, firms can make money two ways.  1. By lending money to the investor to purchase securities on margin ( the spread between what the firm borrows money for and what it lends it to the investor for can be quite large.) Always receive in writing what the company’s BROKER CALL RATE is before investing with margin.  2. When you open a margin account most firms have you sign a REHYPOTHECATION AGREEMENT. This gives the brokerage firm the right to lend out any stock you possess in your account for short sale purposes.  When your stock is lent out the firm receives 100% of the cash value of the stock which they can earn interest on and you don’t benefit at all.  NEVER SIGN THIS AGREEMENT.