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Blogposts by Pasquale J. Sacchetta

Providing insight from more than 32 years of financial industry experience helping you to make better financial planning and family planning decisions.

03
Oct

Loss Leaders Are Not Only Found in Your Supermarket or Big Box Store

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I'm sure you have seen all the discount brokerage ads on television, in magazines and journals...heard the radio ads...and read them on the internet, on your tablet and on your mobile device.

Each one promising a lower cost per trade than the next. Think about it.  Can any brokerage company, whether it's exclusively online or if it has physical locations, survive with the revenue from trades that are priced at $3.95, $4.95 or $7.95?  Do you think it's possible for any brokerage company to survive and prosper from selling their trading services for a fee that is lower than what Starbucks and your local ice cream shops sells their products for?Your Local Big Box Store

Obviously discount brokerage firms need to supplement the very low trading fee with other revenue.  It's like a loss leader in a retail store.  A supermarket will advertise a popular item at a very low price to get you in the store.  It is their hope that you not only buy the sale item but that you buy many other items at full price, since you are there already.  We shop this way and we are used to it.  The supermarkets know this.  They aren't looking at the profit they make on the sale items but the profit they make on all the items being sold each day or week.

I'm sure you have read the fine print.  Don't you think the discount brokerage firm, or any trading firm, has a list of charges for anything else that you may need?  Don't you think they plan on making money on your cash while it's sitting there waiting to be invested?  Of course in this low interest rate environment making money on idle cash isn't as profitable as it used to be.  The low trading ticket charge usually applies to buying and selling stocks or ETFs.  What about mutual funds?  Is there a "preferred" list from which you can trade without any fees?  Why would there be a preferred list?  Because the brokerage firm must make money on that list of funds in some other way in order not to charge you any trading fees.  Otherwise they would not need a preferred list at all.  Compare the expenses for each share class...you'll be shocked when you read the numbers.

Cost is always important.  What is much more important is the bottom line.  In working with our clients, we strive to use the lowest cost share class available.  We don't only consider cost.  It doesn't matter how low the trading fee is if you lose money on the trade.  Then again, if you make money on the trade, you probably aren't as concerned about the trading fee.  The trading expenses should always be considered but they shouldn't overshadow the investment goal.  The main point here is that costs are important but the main overriding concern should be to invest in the lowest cost share class of whatever fund or security is appropriate for your situation.  When dealing with individual stocks, the purchase price and the selling price are much more critical to your overall portfolio success than the ticket charge.

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