How Do Broker-Dealer Fees Really Work?

Utilizing broker-dealer firms is one of several forms of investing in commercial real estate, and there are many benefits to this avenue.

Broker-dealers must be licensed and registered with the SEC in order to sell securities and investments on behalf of clients, and if they work for a reputable company, they have that company’s backing in their favor, which eliminates some potential risk.

In addition, broker-dealers often provide investment advisory services backed up by extensive, credible research and expertise.

That said, something investors must naturally keep in mind when buying securities and investments through broker-dealers is that they charge investors service fees for each transaction—which could be significant.

What’s more, it can be difficult for investors to determine in advance exactly how much the broker-dealers charge and what the fees cover.

While broker-dealer firms are legally bound to disclose all fees and their amounts to investors, exactly how they do this is left largely up to them. Fee disclosure methods and terminology used can vary greatly among firms, which can be very confusing for investors.

However, investors can still benefit from broker-dealer transactions and minimize fees if they know what to look for and what to avoid.

What to Look for in a Broker-Dealer

Be aware of fee timing by requesting a current fee schedule when you open an account with a broker-dealer. Hold off on your investment if an up-to-date schedule is unavailable—knowing when fees are charged is critical to keeping track of your investment.
Request notification of fee schedule changes in writing when opening an account, even though broker-dealers will usually release this information at least 30 days in advance.
Ask about the format of fee disclosure. Some firms will issue a table, chart, or list, while others opt for a written narrative, and not every firm provides actual fee amounts. Investors should request this information in advance.
Read all information about the investment and broker-dealer terms closely and carefully, especially the fine print.
Ask lots of questions and become very familiar with the terminology and methods broker-dealers use with investors regarding fees so there are no unwelcome surprises.
Vet broker-dealers thoroughly through your state or local securities regulator before placing any investments with them. Find out if they are lawfully registered, if there have been any complaints filed against them, and if there have been any legal actions filed previously.

What to Avoid in a Broker-Dealer

Broker-dealers or firms with questionable reputations are not worth the investment, no matter how low the fees are.
Avoid any broker-dealer who balks when you request fee information of any kind or doesn’t provide clear answers to your questions.
Anyone who pushes you to invest and doesn’t give you time to review their fee materials is not looking out for your best interests.
Broker-dealers who won’t provide fee information in writing should be avoided at all costs.

The Bottom Line

For those looking to invest in real estate, the expertise of a seasoned, well-connected, and ethical broker-dealer is often a viable and smart choice.

But investors must be sure to carefully vet firms if they go this route—as with any other industry or opportunity. While there are many capable and reasonably priced broker-dealers, it is wise to read the fine print to weed out any potential bad apples.

A legitimate and experienced broker-dealer, however, can be well worth the fees they charge.

What other questions can I help answer for you about broker-dealers?

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.