Online Brokers

Best online brokers

Fidelity takes the lead overall in reviews when it comes to full-featured online brokers, but the race is close. Fidelity slipped to second place, snapping its four year winning streak as the best premium discount broker at SmartMoney, but the top-ranking E*Trade has suffered from problems on its banking side since that review was published. Fidelity does earn five stars from SmartMoney for trading tools and customer service. Fidelity’s satisfaction rating has dropped from four to three stars in the latest J.D. Power survey, and Barron's also drops Fidelity to the number-three spot in its evaluation, but at Kiplinger magazine, Fidelity ties for first place as one of the best online brokers for mutual fund investors.

Fidelity has designed a three-tier-trading scheme for its customers. Gold level investors are privy to an $8 commission rate, and must have over $1 million in assets at Fidelity, or have $25,000 in assets and make more than 120 trades a year. Those who have assets over $50,000, or who have $25,000 in assets and make between 36 and 120 trades a year, or who make more than 72 trades a year -- pay $10.95 per market trade and are called silver investors. Third tier commission rates (bronze) are available to all customers and are $19.95 per trade. Inactivity, handling and maintenance fees have now been eliminated, and while a $2,500 minimum is required to open an account, with a $250 minimum for additional investments, customers are not penalized for dropping below that minimum.

Although its commissions are on the high side compared to online brokers such as E*Trade, reviews say that the Fidelity website has a lot to offer, including top-notch financial planning tools, research reports and videos from Lehman Bros. and other firms. The biggest bonus may be Fidelity's dozens of branch offices, where customers can go for in-person service.

Ameritrade and TD Waterhouse merged in 2005 to become TD Ameritrade, and the merged company is climbing up the online-broker rankings. For a while, reviews said that the merged company was off to a shaky start, noting that this online broker was still in the process of evolving, as some of the premium features from Waterhouse were added back into the website. But now, Barron's has rated TD Ameritrade number one in its list of web-based brokers, a considerable jump from last year, when the brokerage was second-to-last. Barron's says that TD Ameritrade has wisely adopted the best parts of its two companies, combining the great research of TD Waterhouse with an improved trading platform from Ameritrade. SmartMoney still rates TD Ameritrade in the middle, but likes its new high-tech features such as the StrategyDesk program which allows investors to test trading strategies without actually trading. At J.D. Power and Associates, survey results rank it as one of several online brokers that performs above the industry average in customer satisfaction. Commissions at TD Ameritrade are a flat-rate $9.99, no matter how many shares are traded, and there is no minimum investment to start.

Charles Schwab keeps simplifying its commission structure, an action that SmartMoney calls "a long overdue step." Last year, the broker got rid of its bottom tier of commissions for investors with less than $50,000 in assets in order to better compete with Fidelity. Investors used to pay $19.95 per trade; now it's $12.95. Those with balances over $1,000,000 or who make more than 120 trades per year pay $9.95, two dollars more than Fidelity. Schwab has a $1,000 minimum deposit to start an account, which may be waived if you open a linked checking account or establish a minimum monthly deposit of at least $100. Another plus is that Schwab has dropped a hidden $3 transaction fee it was charging on top of commission for each and every trade.

Schwab offers solid amenities like an easy-to-use website with lots of accessible information and great research tools from Morningstar and Goldman Sachs, among others. And the firm has now branched out into personal banking, offering both credit cards and checking accounts. In the online-broker satisfaction survey at J.D. Power and Associates, Schwab comes in third. Schwab also comes in third for premium brokers at SmartMoney, but it lags at Barron's.

Muriel Siebert gets good reviews in Barron's and Kiplinger magazines, mainly for its quick, efficient service. Barron's reports that the website has been given an overhaul, with added trading functionality and options analytics. The site still has all the tax-reporting tools that have been rated highly in the past and Muriel Siebert continues to offer a high level of account protection, a choice of high-yield money funds and personalized service. Kiplinger says Siebert stands out for mutual fund investors, with a wide selection of no-load funds and few nuisance fees. This online broker has no minimum investment and offers straightforward -- though high -- $14.95 market-order commissions (up to 1,000 shares), regardless of account balances or activity. However, active investors or those with large balances can negotiate lower rates. Barron's names Siebert as one of four web-based online brokers to earn an overall ranking of four stars based on its superb portfolio reports, research and customer help. J.D. Power doesn't include Muriel Siebert in its ratings of online brokers.

ShareBuilder gets a nod in some reviews, though no reviewer ranks it highest in any particular area. This online broker is said to be a great resource for the novice investor. Much of the site is dedicated to education, and it sports plentiful primers and tutorials. J.D. Power gives ShareBuilder an above-average score for its website, but just average scores for everything else. BusinessWeek says that ShareBuilder's automatic-investing program is "great for a newbie's savings discipline." ShareBuilder is one of the few allowing automatic investing in stocks, and such trades incur a very low commission of $4.

ShareBuilder offers three levels of investing: Basic ($4 per automatic investment, $15.95 per market order), Standard (six free automatic investments per month, $2 per automatic investment thereafter, $14.95 per market order, $12 monthly fee) or Advantage (20 free automatic investments per month, $1 per automatic investment thereafter, $11.95 per market order, $20 monthly fee). Forbes suggests looking at the Standard level, as it comes with more useful features, but infrequent investors might like the Basic account, which has no extra fees whatsoever. There are no minimum balance requirements, inactivity or maintenance fees (unless you subscribe to one of the plans with a monthly fee). The catch for automatic investment trades is that trades are only made once a week and are for buying investments only. All sales are treated as market orders. Despite average scores overall, ShareBuilder makes sense for new investors looking to invest a little at a time once a week or once a month, in order to snag low commissions for automatic investments. In November, ShareBuilder was acquired by ING Direct.

Mutual fund pioneer Vanguard is one of only two firms to get five stars in overall satisfaction in the J.D. Powers 2007 customer satisfaction survey, as well as superb scores for information and for its website. We found this very interesting, since no other reviewer rated Vanguard so highly. At SmartMoney magazine, Vanguard finishes last, partly due to its high fees. There is an annual account maintenance fee of $30 and trades run $25 each for those with assets of less than $100,000. That drops to $20 for accounts with over $100,000 in assets, $12 for accounts with over $500,000, and the first 12 annual trades are free with subsequent trades. The account maintenance fee is waived for accounts over $100,000. Additional 10% and 25% discounts may be available, depending on your assets, for traders who make a lot of trades in one year. If you want to buy or sell a mutual fund outside of the Vanguard family of funds (or an additional list of 900 no-transaction-fee funds), it will cost you a $35 fee if your assets are below $100,000, and $20 otherwise. Reviews say that the Vanguard trading platform works best for fund investors who want to buy a few blue-chip stocks to supplement their Vanguard funds.

SmartMoney ranked E*Trade the number one premium broker in July 2007. However, E*Trade ran into trouble with mortgage-backed securities in its banking unit in November 2007, calling into question its very survival. An infusion of cash from Citadel Holdings has insured its survival for now. Still, experts like E*Trade's range of offerings, which include banking services and mutual funds, in addition to its main service of stock trading. The commissions range from $6.99 to $12.99 for a market order, based on your asset amount or number of trades in a quarter (1,500+ trades earns the lowest market order, less than $50,000 in assets warrants the highest). Like Fidelity and Scottrade, E*Trade has branch offices (in 14 states and Washington, D.C.) where customers can go for in-person advice.

E*Trade does have a $40 maintenance fee per quarter (raised from $25) if you don't make at least one trade every three months (IRA and custodial accounts are exempt). Those with additional E*Trade accounts or at least $10,000 in assets may avoid the fees. But E*Trade does provide many free and usually unpublicized services, such as asset allocation advice and financial planning. Research tools, praised in reviews, include screen charting and analyst research from seven independent sources. There is a $1,000 opening deposit for cash accounts. However, given E*Trade's low customer service scores, ShareBuilder may be the better place for those new to online investing. Be aware that BrownCo and Harrisdirect have now been absorbed into E*Trade.

No frills discount brokers

If you are mainly interested in low commissions and don’t need a lot of handholding, you now have more choices. BusinessWeek calls Scottrade the best online broker for the money, citing its low cost and excellent service. In the survey at J.D. Power, Scottrade scores highest in customer satisfaction and ranks first overall for the seventh time in eight years. This online broker's commissions are much lower than those of Fidelity and Schwab. The minimum opening balance is just $500, and market orders are only $7. Trade executions are fast and there are free real-time quotes. The drawback is that the company doesn't have the top-drawer research that Fidelity or E*Trade offer, according to SmartMoney. At Kiplinger's, Scottrade also loses points on research, broker knowledge and for its low interest rate paid on cash accounts. But there are more than 300 offices around the country, something most online brokers don't have. Furthermore, there are no account inactivity fees and no maintenance fees at all. Buying no-load mutual funds that have transaction fees or that are held less than 90 days incurs a $17 commission. Like many brokers, Scottrade also offers a big selection of NTF (No Transaction Fee) funds, for which you pay nothing to buy, sell or exchange (you do pay fund expenses). While professional reviewers favor Fidelity's web interface, services and online investment tools, Scottrade is less expensive, and it has high customer service scores, along with lower commissions.

Many reviews give OptionsXpress high marks. OptionsXpress was the highest ranked online broker for four years in a row at Barron's, but this year it was nudged by the thinnest of margins to second place by TD Ameritrade. This firm gets good reviews, but its commissions are higher than some others. OptionsXpress trades are $14.95 for the first eight per quarter, though the rate drops to $9.95 per trade after that. There is no minimum deposit to open a cash account. SmartMoney demoted OptionsXpress for the second year in a row, putting it in fourth place in its discount broker ratings. But according to reviews, OptionsXpress has fast service, a wide fund selection and low fund prices, though stock commissions aren't the cheapest. Barron's likes the extensive research tools and excellent educational information at OptionsXpress. There have not been a lot of changes since last year because the company was converting to self-clearing, which should help keep costs down. The online broker did introduce a universal account, allowing customers to trade all their asset classes under one account, and a new feature called Chart Patterns that lets clients find stocks that fit specific technical trends. OptionsXpress started out as an options-only company, but it now handles stocks and mutual funds as well. This site makes sense for investors who trade a lot.

Thinkorswim deserves mention, because it tops Barron's list of software-based online brokers for the second year in a row. The site, launched in 1999, got its start by specializing in options trading, but has since added stocks, mutual funds and bonds. Experts say Thinkorswim is packed with tools, offering the ability to perform pricing studies that detail the risks and rewards of a trade, and it allows users to conduct a mock trade as a learning vehicle. Barron's says that Thinkorswim stayed on top by launching 12 software revisions in the past year, adding tools and making its platform more stable. Commissions for market orders of stocks are $9.95. Thinkorswim used to be only software-based, and although most users still download the software, it now has an online browser interface with almost as many features as the software. SmartMoney gave Thinkorswim less glowing marks in its discount broker category last year, and didn’t even include it in its ratings this year.

For the second year in a row, SmartMoney rates another options specialist, relative newcomer TradeKing, as the top discount broker for its low commissions. According to SmartMoney, TradeKing has joined in the competition between brokers to add online high-tech enhancements. A new technical analysis center uses pattern-recognition technology to look for 60 different patterns in publicly traded stocks. Commissions for market trades are only $4.95, and there is no minimum deposit to open a cash account. However, reviews also note that TradeKing has its pricey quirks, such as a $14.95 transaction fee for buying mutual funds.

Firstrade landed in third place in the same SmartMoney ranking of discount brokers, beating OptionsXpress and Muriel Siebert. Reviews note Firstrade’s extensive banking amenities and efficient bond trading. Like TradeKing, Firstrade commissions are also low, at $6.95 per market order, with no minimum deposit for a cash account. Firstrade came in tenth out of fifteen in Barron’s ranking of web-based online brokers.

Full-service brokers

If you're not comfortable making your own independent investment decisions, or if you feel that you need assistance, you may want to forego the use of online and discount brokers altogether and instead use a traditional full-service brokerage firm. Here, Edward Jones regained the number one position in the SmartMoney review in 2007, due to improved stock picking. It also gets high scores in the customer satisfaction and statement categories. Edward Jones is also top rated in overall customer satisfaction for the third year in a row in a survey of full-service brokers at J.D. Power and Associates.

Merrill Lynch earns the number two spot in the review at SmartMoney magazine. It scores five stars in stock picking. After these reviews were printed, The New York Times reported that Merrill Lynch became another company to suffer large losses related to subprime mortgages. The CEO resigned in November 2007 and was replaced by John Thain, former head of the New York Stock Exchange.

Of course, the line between the discount brokers and full-service brokers is becoming blurrier. Most online brokers now offer investment advice, portfolio analysis and financial planning services to their wealthier clients. Many brokers also offer a range of commissions depending on how the trades are made. The lowest commission is for online trading. The next level is for electronic or phone placement of orders. Broker-assisted trades cost the most, but this kind of assisted trading provides one-on-one consultation and personalized investment advice, which is helpful if you're unsure of your investment acumen and/or too busy to research potential investments yourself. The huge amount of investment and financial advice available in print and online can be both confusing and overwhelming, and it requires time to sift through and read.

Some investors feel safer making investment decisions by meeting face-to-face with investment professionals rather than by entering sensitive data online, but one-on-one meetings can be time-consuming and possibly inconvenient, especially if the broker you feel is best for you is not located nearby or does not have branch offices. The rise of online brokers was designed to expedite investing in this fast moving business.

Important Features: Online Brokers

Experts say to look for the following features when choosing an online broker:

• Think about what kind of trader you are. If you trade often, then the lowest commission may be important. If you buy stocks occasionally and hold them for years, then good customer service may be worth more to you.

• Read everything on the broker’s website about commissions and fees. Does the commission change based on type or size of order? Look for additional fees such as an inactivity fee or fees for closing your account.

• Check if there is a minimum amount needed to open or maintain an account, or to receive low commissions and trading tools.

• Look for free trading tools, such as real-time stock quotes and free market research and education.

• It may make your life and tax accounting simpler to have all your investment accounts in one place. See if you can trade investments other than stocks, such as ETFs and mutual funds. Note which mutual funds are available, and what the fees are for trading. Will the broker let you open a retirement account?

• Compare the interest rate on cash in your account to what you can get elsewhere.

• Find out the broker’s policies on security. Look for guarantees that your personal information is protected, and that your account is insured. Look for articles online about the broker to see if there are any recent reports that might cause you concern.

Our Consensus Report shows how many times products are top-ranked by reviewers included in our
All The Reviews Reviewed chart.

# of Picks	Online Broker
6	E*Trade
5	Scottrade
4	TD Ameritrade
3	Fidelity
3	OptionsXpress
2	Schwab
1 each	Firstrade, Interactive, Edward Jones, Merrill Lynch, ShareBuilder, Muriel Siebert, Thinkorswim, TradeKing, Vanguard

Interestingly, no online broker finished in the top spot in more than one review, though several are runners up. Barron's gives Thinkorswim the top spot as software-based broker and TD Ameritrade its highest rating for web-based broker. But TD Ameritrade only ranks in the low midrange at J.D. Power and SmartMoney. Kiplinger's gives Muriel Siebert their highest rating for best online broker for mutual funds, though it ranks in the upper midrange as a web-based broker at Barron's and even lower at SmartMoney. SmartMoney top-rates E*Trade (before its current problems) as best premium broker, but it gets low customer satisfaction scores at J.D. Power and ranks in the middle at Barron's. Scottrade ranks number one in customer satisfaction at J.D. Power, and gets a second place score at SmartMoney, but receives a low ranking at Barron's.

For ConsumerSearch Fast Answers, we looked for online brokers that score consistently near the top, and who have thus far managed to avoid fallout from the current crisis involving subprime mortgages.

 

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