Brokerage Bonuses 101

Doctor of Credit has the most up to date list of the best brokerage bonuses.

The type of account(s) you have will determine your eligibility for a brokerage bonus. You always have to make sure that the bonus matches the account type you are transferring from. Cash or margin brokerage accounts typically have more lucrative bonuses as brokerages can generate more revenue from margin loans, securities lending, and options. Rolling a 401k into an Individual Retirement Accounts (IRA) can result in much larger balances in these accounts for many people. Therefore even if they have less valuable promotions, you may qualify for higher bonus tiers and ultimately get higher bonuses from your IRA. Also as discussed below, the bonuses for IRAs tend to be tax deferred whereas you pay taxes on cash/margin account bonuses.  

Unlike checking and savings accounts which are mostly similar, brokerages can differ considerably. Commissions for retail brokerage accounts are now universally zero except for options and more exotic securities. The real differences between brokers lie in their interfaces/ease of use, margin loan rates (borrow money to buy securities), the breadth of securities/assets you can trade, and the assets they will custody (hold).  

Newer mobile focused brokers

• Firstrade – I have not used them
• MooMoo – Confusing interface, large number of promotions
• Robinhood – Easy to use interface, broad range of securities including crypto, also has prediction markets
• Tradeup – I have not used them
• Webull – Mobile focused, okay interface, great bonuses

Traditional brokers

• HSBC, Wells – Harder to use interface linked to their banking products, okay customer service, really high bonuses for large accounts but must open checking accounts with them.  
• E-Trade, Merrill Lynch, Schwab, Chase self-directed – All very similar, great customer service, easy to use interface, higher margin rates, lower bonuses

Interactive Brokers

• Interactive Brokers – A category unto itself, difficult to use interface, highly automated which can be a pain when things go wrong, best margin rates, broadest range of securities you can trade, cheapest to use when you have higher volumes.

When you sign up for a brokerage bonus you have to maintain an amount of net qualifying funds for a period of time. Net qualifying funds are equal to deposits + securities transferred in – cash withdrawals – securities transferred out. Market fluctuations usually don’t count for or against you. For example if there is a 1% bonus and you transfer securities worth $200k and the market goes down 10%, you will still receive 1% of $200k or $2,000. Although rare, there are a few brokers that will have a hard minimum account value that you need to maintain for a bonus irrespective of market fluctuations so make sure you read the terms and conditions of the promotion.

In order to get a brokerage bonus, you typically have to deposit or transfer in (net qualifying funds) a certain number of dollars and hold it for a period of time, usually between 60 days and 1 year. The bonuses are usually tiered based on the amount you must deposit and maintain, for example E-trade has the following tiers for cash/margin accounts:

• $1-4,999 gets $50
• $5,000-19,999 gets $150
• $20,000-99,999 gets $200
• $100,000-199,999 gets $600
• $200,000-499,999 gets $800
• $500,000_ gets $1,000

Think of the bonus as a risk-free enhancement to your portfolio’s annual return. The higher the deposit and the shorter the holding period, the more valuable the bonus. A higher overall percentage bonus such as the 2% bonuses recently offered by Robinhood (5 years) sound incredibly attractive at face value, but the five year holding period means you are only really getting 0.4% a year. Compare that with a fairly standard Merrill Lynch brokerage bonus that is also roughly 0.4%, but the hold period is only 90 days. In the first year alone you could collect roughly 4/5 years of the Robinhood bonus by switching accounts every quarter.

Webull currently has the best of both possible worlds, a 2% match and a 13-15 month holding period.

The obvious issue with switching brokerages is that it takes time (less than an hour) and requires some paperwork. If your time is highly valued and the brokerage is only a few hundred dollars, switching brokers may not be worth it. However, as your net worth increases, even though your hourly opportunity cost likely increases, it is unlikely to equal the $1k+ you receive when you start to hit higher bonus tiers.

Transferring assets from one brokerage to another is done via an ACAT or (Automated Customer Account Transfer Service). You initiate the ACAT with the receiving broker who will “pull” the securities present in your existing brokerage account into your new account. Some sending brokers may also require you to fill out paperwork acknowledging that you authorized the transfer.

Partial ACATs

Brokers may also charge an ACAT fee of $50-100 which the receiving broker will often cover. If you are uncertain call in and ask, they may always make an exception. You can sometimes avoid an ACAT fee by doing a partial ACAT where you leave a few securities in the account.

There are two things you need to make certain of when completing an ACAT: that your cost basis transfers correctly and all your positions can be held by the receiving broker.

Cost basis

Your cost basis is the price you paid to buy a security. The difference between your cost basis and the price at which you sold (or bought if shorting) is your taxable gain. Once you leave a broker it can be a pain to get the basis from them so you want to make sure that the basis transfers over properly. I would also highly recommend downloading all your historical statements before transferring so you have the original basis documented.

OTC and crypto

Brokers don’t like having to custody or hold certain securities namely Over the Counter (OTC) stocks and crypto. They are either problematic for their systems, cause more paperwork, or result in more customer problems than the revenue they generate. To avoid any issues check with the receiving broker to see if they typically don’t want to custody any of the securities in your portfolio. It is worth specifically asking about anything that is more exotic. If  they won’t custody a specific security either consider selling it or doing a partial ACAT wherein you retain the exotic security in your original account.

Unlike credit card rewards, brokerage bonuses are taxable and you will receive a 1099 the year that you receive them. The same is true for brokerage referral bonuses. However, if you receive a brokerage bonus that is deposited into your IRA, you will not receive a 1099 and you will only pay taxes when you withdraw the funds at retirement if it is a traditional IRA or will not pay taxes at all if it is a Roth IRA.

A brokerage will sometimes match the bonus you would have received by switching to another broker if you call and ask. I once switched my IRA from Schwab to Wells Fargo and got a call from Schwab asking where I was sending my account as they could potentially match the bonus. Unfortunately, they would not match Wells Fargo’s bonus, but they will often match other companies. If you are planning on switching brokers call the customer service line and see if they will match the bonus you are receiving. Usually you have to keep the funds a year ,but it may be worth it to avoid the hassle of moving while still maintaining the optionality of being able to move in a year.