Online Broker Review

Finding a good online broker

For this report, we found several current and comprehensive reviews from some major financial publications. A review at SmartMoney takes the top spot in our chart as the best comparative evaluation of online brokers. This year, for the first time, SmartMoney's review does not divide brokers into two groups -- premium and discount. The editors explain that online brokers no longer fit neatly into categories, as each one tries to offer the broadest range of products and services at the lowest cost. Instead, SmartMoney names the best and worst online broker in each of six areas, such as commissions, fees and research and trading tools. Another excellent resource, Barron's 2008 review, ranks 23 online brokers and assigns them scores in each of eight areas. The comparison charts in this review make it a valuable resource for investors who want to compare brokers on specific criteria. Kiplinger's Personal Finance magazine compiles an in-depth ranking of the 12 brokers best suited to mutual fund investors. There are no charts, so the reader must sort through the review to find information about a particular broker or area. We also appreciated a large customer-satisfaction survey from J.D. Power and Associates. Editors there surveyed more than 5,000 investors, rating brokers on trade execution, fees, customer service and information resources.

The aftershocks of problems in the U.S. housing market were felt in the brokerage industry beginning in late 2007. After E*Trade absorbed competitors Harrisdirect and BrownCo, several reviewers rated the firm highly. However, E*Trade hit a rough patch in November 2007 as the result of large holdings by its banking unit of complex bonds tied to the American housing market. E*Trade's stock fell by more than 50 percent, but the company was rescued by Citadel Investment Group. This year, many reviewers again give E*Trade a thumbs-up, but Barron's November 2008 review contends that the firm is still scrambling to right itself. Merrill Lynch was also rocked by problems with subprime mortgages in November 2007; the firm continued to struggle and was bought by Bank of America in September 2008. Other consolidations occurred in 2008: ShareBuilder was acquired by ING Direct, TD Ameritrade purchased Fiserv's institutional support unit, and Terra Nova bought RushTrade. Competition still remains fierce, however, according to experts, which puts the individual investor at an advantage. Meanwhile, the average commission rose slightly, from $6.35 to $6.52 per 500-share block, according to Barron's.

Many large banks now offer online brokerage services, which might work well for investors whose needs aren't too complex. Many also offer enticements like free trades and better interest rates on cash balances. For example, Bank of America offers 30 free trades per month for clients with at least $25,000 in combined accounts through its Banc of America Investment Services subsidiary. WellsTrade, Wells Fargo's brokerage arm, also requires at least a $25,000 "banking relationship" to qualify for 100 free trades each year. ShareBuilder is now owned by ING and is thus a bank-run brokerage as well. According to Barron's, bank-based brokerages like the three mentioned above offer a narrow range of products, and they include few tools for research, analysis and trading on their websites. Barron's adds that there is no reason to use one of these brokerages unless you already have a relationship with the bank and can qualify for free trades and no maintenance fees. Still, for those who want the convenience of investing where they do their banking and don't need a lot of bells and whistles, bank-based brokerages may be a good option.