The Myth of Free Investment Brokerages in Europe

  • By: Walter Dunphy ACCA
  • Date: October 3, 2022
  • Time to read: 5 min.

Retail investors in Europe are being hoodwinked into signing up for investment accounts with brokerages they believe to be low cost, or even completely free. But are these LOW-COST brokerages really just a myth? Just a costly service in disguise?

Let’s investigate how these brokerages make money.

Go to the homepage of any of these investment brokerages that operate in Europe and splattered all over will be claims that they have next to no fees.

Deep down in the terms and conditions

Case in point, if we look at the Trading 212 home page – they advertise themselves as a commission-free broker, but in the small text they note that ‘other fees may apply’.

Case in Point – Trading 212 home page

This can give potential clients a false sense of security in thinking that they will face little to no fees by using the service.

Call it clever marketing or maybe it’s unethical but you have to look pretty hard before you can find a clear view of what the fees are when trading on any investment brokerage.

This applies to all brokers, not just Trading 212.

These brokers aren’t providing this service out of the good of their heart, they are large profit-driven corporations and not your mate that wants you to become a millionaire.

We don’t really have a choice in the matter. If we want to invest we have no choice but to use an investment brokerage no matter what the fees are. We as retail investors currently don’t have the option of skirting around financial intermediaries.

Another reason the fees are ignored is that the average investor often overestimates how well their investments will be performing. The fees won’t matter because they are going to make so much money the fees will be inconsequential.

But you should be at least aware of all of the different fees charged by investment brokerages before you sign up. If you plan to invest over your lifetime then small fee differences can work out to be a massive sum of money.

How Investment Brokers make their money

Brokers have a number of income streams which are costs to the end-user such as:

Trade Commissions

These fees are charged at the point when you buy or sell any stocks. Often this is the fee that can be waived by brokers to entice new clients to sign up for an account.

BrokerTrading 212Bux ZeroDegiroEtoroRevolut TradingInteractive Brokers
Trade CommissionNoneFrom €0-1.5 depending on order typeFrom €0-5 depending on marketNone1 fee trade per month. €1 on everything elseFrom €0-0.0035 per share depending on market
On stocks

But there may be many more fees that are almost hidden.

Fx Conversion Fees

FX conversion fees can add up when you are depositing your money in euros and then going to buy US stocks which are denominated in US dollars. When you buy or sell your stocks you will be faced with this currency conversion fee on both sides of the transaction.

BrokerTrading 212Bux ZeroDegiroEtoroRevolut TradingInteractive Brokers
Fx Conversion Fee %0.15%0.35%0.25%0.15%None0.02% x trade value, with a minimum of US$2 

This works out to €2-€7 in Fx conversion fees per €1,000 you invest.

The Bid/Ask Spread

The Bid/Ask spread is by far the biggest earner for investment brokerages and one that can often be very difficult to see how much it is really costing you.

For anyone not in the know, the Bid/Ask spread is the difference between the actual market price of a stock and the price the broker will sell the stock to you or buy it from you.

What even makes the spread more tricky to keep track of is that they vary over time depending on volatility and liquidity.

Let’s take a brief look at an example using Tesla on Trading 212.

The Buy price of Tesla at this particular time is $632.95 and the Sell price is $632.36.

This equates to a spread of 0.09% [(632.95-632.36)/632.36].

This means that €10,000 invested in Tesla will cost you approximately €9 due to the bid-ask spread.

As previously mentioned there are times when the spread can be significantly higher at a rate of close to 0.70% which can make this much more costly for the retail investor.

As an exercise, you should repeat this calculation for a selection of stocks with the broker you use to see just how big or small the spread is.

Inactivity Fees

Inactivity fees tend to rub up investors the wrong way. These are fees charged on your account for simply not investing for a specified period of time.

In past times, brokers such as Interactive Brokers charged inactivity fees but these have been phased out and are now not commonly charged by brokers in Europe. Etoro still has a fee if you haven’t been active for a year.

It is worth checking before signing up for a broker to see if they have inactivity fees or not, especially if you are a passive investor.

Withdrawal Fees

After you have made your profits and now it’s time to withdraw them to live the good life, the last thing you want is to be hit with a big withdrawal fee.

Luckily this is also a fee that brokerages tend to shy away from, here is a summary of the fees for some popular European brokers.

BrokerTrading 212Bux ZeroDegiroEtoroRevolut TradingInteractive Brokers
Withdrawal FeesNoneNoneNone$5 for anything other than USDNoneone free withdrawal per month and charges a fee for each subsequent withdrawal
Custody Fees

Another fee to keep an eye out for with your broker are custody fees, these are usually charged as a percentage of your total portfolio value held.

For example, Revolut trading has a custody fee of 0.12% per annum. This would equate to €12 per €10,000 invested.

Again, this is not going to break the bank but all of these different fees can really add up.

But always remember, any of the fees incurred when buying or selling your stocks can be offset against your profits when you are calculating your taxable profit for capital gains tax purposes.

Disclaimer: This blog post is for informational and educational purposes only and should not be construed as financial advice.

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