The cost of investing in a free broker

The advertising of online brokers with zero commission hooks has increased in the last year and even more so if what they offer the investor is to bet on cryptocurrencies. These assets, which generated mistrust when bitcoin emerged, have proliferated and offer investors great returns, although also at the cost of strong volatility. Behind both issues is, like practically everything that has happened in this year and a half, the pandemic.

"By limiting sports betting, there were many people who saw in the financial markets an opportunity to move money or maintain the regular activity that they did through them, but linked to the evolution of the stock market," explains Darío García, an analyst at XTB. To this factor, Tali Salomon, regional director of eToro for Iberia and Latin America, adds the confluence of other circumstances, "such as zero or negative interest rates or the acceleration of the adoption of digital technologies." This is where the Reddit phenomenon and the role that social networks have played are observed, leading hedge funds to lose billions of dollars to try to compensate for the operations of numerous retail investors who shot up the Stock Market in just one day. shares of companies that were virtually bankrupt.

However, these investments, which may seem very juicy and offer very high profits in the short term, also have their risks, which are based on two fundamental issues: by facilitating these operations with technology, anyone with a minimum of capital -and even requesting loans, they explain from eToro– you can invest, without having knowledge of the financial market and therefore risking heavy losses. On the other hand, not all platforms offer the investor the security that they should guarantee, nor is operating on them as free of commissions as they promote.

When opting for one or another broker, you have to observe the fees linked to the operations, which usually vary depending on whether they are for shares in the Spanish market, European or American stock markets; those referring to the custody –maintenance of the shares– and those that apply to the collection of dividends. The most aggressive platforms, such as eToro, Robinhood or Ninety Nine, among others, exempt the client from all these expenses. The first two also offer the possibility of buying fractional shares, which allow them to invest without making a large outlay, another attraction for these retail investors.

Meanwhile, brokers have cut themselves off from banking: "Having a much more complex and therefore more expensive cost structure, they are less profitable when operating because they have associated costs that, to start obtaining personal profitability , first you have to cover some costs –the commissions–, that today's banks cannot afford to stop charging", explains García.

Thus, bank fees are mainly aimed at large investors, with fixed prices for capital of up to 15,000 or 20,000 euros, and variable prices depending on the amount invested for higher amounts. Thus, an investor who decides to bet less than 2,000 euros using one of its platforms will face costs of between 3 and 10 euros –if it is about shares listed on the Spanish market, otherwise it will become more expensive–, which will be to add the custody commission, which can amount to a minimum of 20 euros per year, and those for collecting dividends, between one and two euros.

The question that arises then is where the income of free brokers comes from to make them profitable businesses. And the answer is that its use is not 100% free. The CEO of Ninety Nine, Javier Sanz, explained in an interview to CincoDías that his income comes from the cost of currency exchange. eToro, for its part, although it exempts clients from essential commissions, it does not do so from others such as the aforementioned currency exchange, in addition to charging the client for the withdrawal of funds. In addition, for special assets, such as CFDs, it includes a charge for spreads, that is, the difference between the purchase price and the sale price of an asset, as well as commissions for positions that remain open overnight.

Totally different is Robinhood's business model, the nature of which makes it unfeasible in Europe due to Mifid 2 regulations. This platform acts as an intermediary: it sends user orders to market makers in exchange for payments, a a practice known as pay per order flow, and in the case of cryptocurrency trading, transaction refunds. This causes Robinhood to charge a commission and the final price of the share that the investor pays is not the market price, but higher by including this extra fee. In addition, the company also earns revenue from premium services – Robinhood Gold – that include access to high-end instant transfers or exclusive market insights.

Get informed before operating

For all these reasons, experts recommend taking into account several issues before starting to operate on a platform. In the first place, it is essential to verify that "it is an authorized entity and not a financial stall", they explain from HelpMyCash. To do this, the simplest thing is to go to the website of the National Securities Market Commission (CNMV) which has a list of warnings, which includes entities that "do not have any type of authorization or are registered for any purpose with the CNMV and that they could be carrying out some type of fundraising activity or providing a service of a financial nature".

Secondly, it is necessary to find out about "the products that it sells and the markets in which it does so, since they are often limited and investment options are lost," says Antonio Gallardo, a finance expert at iAhorro.

On the other hand, it is key to check the fees carefully to see what expenses are included in the free fees promoted by the platforms and under what conditions: they can be more expensive than other brokers when a number of operations is exceeded or have limitations in the amount of assets to buy, emphasizes Gallardo. In addition, he indicates that it may happen that the custody expenses are derived to another entity outside the group and, therefore, be higher.

Last but not least, the basic rules of the investor should not be forgotten, among them, that "not all the savings should be invested, an emergency fund should be maintained, nor the money that is needed in the short term ; and that not diversifying and betting everything on a single stock can be very risky," HelpMyCash experts conclude.