Questions to Ask Before Investing with a Broker
When opening a brokerage account, headline "zero commission" claims often distract investors from the real costs of trading: foreign currency spreads, custody fees, payment for order flow, and transfer penalties. Before depositing your savings, run through these practical questions to verify custody security, statutory investor protection, and total costs.
Before you open the account
Take a few minutes to audit your planned investment frequency and currency requirements. If you intend to purchase foreign index funds or overseas equities, currency conversion charges will often cost you far more than trade execution fees.
Prepare a snapshot of your starting capital and planned monthly contributions. You can track your total asset distribution and liquidity reserves using our free net worth calculator.
The questions to ask your broker
Review these questions against the broker's pricing schedule before depositing money:
1. What is your foreign exchange (FX) conversion markup?
Why you ask: Many retail brokerages advertise zero commissions while adding a 0.50 percent to 1.50 percent spread on every foreign currency trade. If you deposit €10,000 to buy US-listed stocks at a 1.0 percent markup, you pay €100 immediately on entry and another €100 when selling and converting back to euros. That €200 cost dwarfs standard brokerage commissions.
Ask whether the broker allows you to hold a native multi-currency cash account (such as separate USD, EUR, and GBP sub-accounts) so you can convert currency once in bulk or fund directly in the asset currency.
2. Are there ongoing custody, inactivity, or account maintenance fees?
Why you ask: Some traditional banks and brokers charge monthly custody fees (for example, 0.15 percent to 0.30 percent per year of your portfolio value) simply for holding securities in your name. Others charge quarterly inactivity penalties if you do not execute a minimum number of trades. For buy-and-hold index investors, custody fees create an ongoing drag.
3. What are your minimum trade commissions and exchange pass-through fees?
Why you ask: A broker advertising low percentage rates (such as 0.08 percent per trade) may impose an unstated minimum ticket fee of $10 or €15 per execution. An investor making a recurring monthly contribution of $200 who pays a $10 minimum fee suffers an immediate 5.0 percent haircut before their money is even invested.
Check whether local stock exchange fees, financial transaction taxes (such as stamp duty in the UK or transaction tax in France and Spain), and regulatory clearing charges are bundled into the quoted commission or added on top.
4. What legal entity holds my assets, and what is the statutory compensation limit?
Why you ask: In the event of broker insolvency or fraudulent accounting, statutory investor protection funds provide a legal safety net. The coverage limit depends strictly on the jurisdiction of the broker entity holding your account:
- United States: The Securities Investor Protection Corporation (SIPC) protects up to $500,000 per customer, including a $250,000 limit for cash balances. SIPC covers missing securities in broker failure; it does not protect against market drops.
- United Kingdom: The Financial Services Compensation Scheme (FSCS) covers investment claims up to £85,000 per person per authorized firm.
- European Union: Under Directive 97/9/EC, national investor compensation schemes provide statutory coverage up to €20,000 per investor (in the Czech Republic, the Garanční fond obchodníků s cennými papíry covers 90 percent of claims up to €20,000).
5. Do you engage in securities lending with my shares?
Why you ask: Some discount brokers enroll customer accounts into automated securities lending programs by default. The broker lends your shares to third-party short sellers in exchange for borrowing interest. If the borrower defaults, you rely on collateral posted by the borrower, and shares on loan may lose statutory investor protection. Ask whether lending is mandatory or whether you can opt out.
If the broker shares lending revenue, check what percentage of gross lending income is credited to your balance and whether you retain voting rights while shares are lent.
6. How much does it cost to transfer my portfolio to another broker?
Why you ask: A broker should never hold your assets hostage. Outbound automated customer account transfer (ACATS) fees range from $0 at discount firms to $100 or more per account at traditional firms. European brokers often charge 20 to 50 euros per individual position line. Know the exit fee before depositing.
Ask whether the broker supports in-kind transfers or forces you to liquidate all positions into cash, which could trigger immediate taxable capital gains events.
7. Do you receive payment for order flow (PFOF) on my trades?
Why you ask: Payment for order flow occurs when a broker routes retail orders to wholesale market makers rather than public exchanges, in exchange for cash rebates. This practice creates potential conflicts regarding best execution price quality. Note that PFOF is subject to strict regulatory restrictions in the European Union under revised MiFID regulations.
8. How are fractional shares held and executed?
Why you ask: Fractional shares allow investors with small recurring contributions to buy high-priced shares. However, fractional shares cannot be held directly on central depositories (like DTC or Euroclear) and cannot be transferred via ACATS. The broker holds the whole share in its own principal account and creates a synthetic fractional entitlement for you.
If you later decide to move to another broker, fractional shares must almost always be sold to cash, triggering taxable transactions and potential trading commissions.
Official documents and registers to verify
Before funding your account, verify the broker on regulatory registers and inspect their statutory disclosures:
Regulatory registration verification
Confirm that the broker holds a valid broker-dealer license in your jurisdiction. In the US, look up the firm on FINRA BrokerCheck. In the UK, search the FCA Register. In the Czech Republic, check the ČNB official lists and evidence.
Execution quality reports
In the US, brokerages publish quarterly SEC Rule 606 reports disclosing order routing venues and payments received. In the European Union, brokers publish RTS 28 annual reports summarizing the top five execution venues for each class of financial instruments.
What a non-answer sounds like
Marketing materials often disguise fees behind slogans. Use this table to decode common broker talking points:
| What they say | What it usually means | What to ask next |
|---|---|---|
| "Trading on our platform is completely commission-free." | The broker monetizes your trades through hidden spreads, payment for order flow (PFOF), cash balance interest skimming, or foreign exchange markups. | What is your exact spread markup over the interbank exchange rate, and do you receive payment for order flow on equity orders? |
| "Currency conversion happens automatically at competitive market rates." | They add an undisclosed 0.5 percent to 1.5 percent markup each time you buy foreign shares, taking a toll both when buying and selling. | Can I maintain multi-currency cash balances (such as USD and EUR) without mandatory automatic conversion on every transaction? |
| "Your assets are backed by multi-million-dollar insurance policies." | Private excess insurance policies have collective caps and strict exclusions. They want to avoid discussing statutory government-backed compensation limits. | Which national investor compensation scheme covers my account, and what is its statutory per-investor legal cap? |
| "Share lending is a standard industry practice that provides liquidity." | They lend your fully paid shares to short sellers, keeping most of the lending interest while exposing you to borrower default risk. | Can I opt out of fully paid securities lending, and what percentage of gross lending income is credited to my account? |
| "Transferring your portfolio to another institution is quick and painless." | They charge $75 to $150 per ACATS transfer or charge 20 to 50 euros per security line to release your custody assets. | What are your exact outbound transfer fees per position and per full account transfer in your published fee tariff? |
| "We execute orders using sophisticated smart order routing." | Orders may be routed to internalizers or market makers offering the broker highest rebates rather than the best price execution for you. | Please provide your latest SEC Rule 606 report (in the US) or RTS 28 best execution report (in the EU) showing where client orders are routed. |
Next steps and due diligence
Explore our related guides before placing your initial trades:
- How to Evaluate an Investment Checklist – 11 checks covering total costs, asset ownership, liquidity gates, and statutory prospectuses.
- Questions to Ask a Wealth Manager – How to interview advisers regarding ongoing management fees and Form CRS disclosures.
- Portfolio Risk Review Prompt – Test your proposed asset allocations against historical stress periods.
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This is general information, not financial or legal advice. Sumio is made by Fiduciary s.r.o., a software company, not an adviser or broker.