Understand the Limitations of Zero Commissions and Fractional Shares

Written by: John Drachman

Whether you are looking for a 100-share round lot, a single or a fractional share, a financial professional is ready to make your trade.

But what about the underlying fees that go into the purchase? How can you be confident a financial professional is executing in “your best interest” and for the best price? You can accidentally pay a lot more in fees for fractional shares over whole shares by investing small amounts in many different companies without doing your homework.

While increasing platforms advertise commission-free trades, investors should not think of them as a free lunch. Whether trading stocks online or seeing a financial advisor once a quarter, professionals still need to plug in their computers to make trades and turn the lights on to view customers on Zoom.

Not every brokerage allows customers to buy or hold fractional shares. TD Ameritrade famously advertises “0$ for trading commissions; $0 account minimum.” The drawback: The popular platform does not offer fractional shares.

A low pricing structure can also limit selections. Schwab Stock Slices offers a $5 minimum to start, and online S&P 500 trades are commission-free. For tech enthusiasts who prefer the action over at NASDAQ, the selection limitation could be a deal breaker.

Fees among platforms, wealth managers, and financial advisors make simple “apples to apples” cost comparisons between fractional shares and whole shares problematic. SoFi Invest provides an easy-to-use schedule of fees that offers a good model for other platforms you may be considering. Under the section “a few potential charges to be aware of,” SoFi details a laundry list of costs that include wire transfers, paper confirms, IRA closing fees, and FINRA Trading Activity, among others.

If fractional shares are part of your investing plan, you might want to limit your choice of firms. However, if you are not inclined to wrestle through the finer points of trading fees and expenses, think about the advantages of working with a fee-based advisor. The Fiduciary Institute offers a seven-point checklist for investors in their search for a fee-based professional. According to the Institute, financial advisors should agree to the following:

“Only accept compensation paid to us by our clients. Avoid conflicts to the best of our ability. Disclose and explain important information and agreements verbally and in writing. Maintain our designations with ongoing education of knowledge and skills. Provide advice based on clients’ goals, circumstances, concerns, and tolerances for risk. Disclose clients’ fees and expenses in writing.”

The Bottom Line

Being in the dark concerning the nuances of trade execution is one thing. Make sure your financial advisor is working in your best interest regardless of whether you opt for one share of Class A Berkshire Hathaway (BRK-A) at $427,832.75 or $50 worth of Apple.

Related: Should You Turn Your Vacation Home into an Airbnb?

John Drachman is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. John is an IABC award-winning writer who applies his 30 years of financial marketing experience toward advancing the dialog between investors and investment professionals.