Early Bird Special (EBS)

[Stock]

The Right Broker for You

http://www.smartmoney.com/brokers/index.cfm?story=august2006

By Megan Barnett and William Mauldin
July 11, 2006

2006 Broker Survey
As mergers change the broker landscape, choosing the best one is more important than ever. After hundreds of trades and countless clicks, we've run 21 brokers through their paces and ranked them on everything from stock picking to trading tools.

Premium Brokers1
Full-Service Brokers2
Discount Brokers3

KEEN MCHUGH DIDN'T choose to go to E*Trade — the choice was made for him in a corporate boardroom. He had spent several happy years with Harrisdirect, another discount brokerage, but in the latest round of the consolidation sweeping the discount broker industry, McHugh and thousands of other Harrisdirect customers instantly became customers of E*Trade one day in January.

With control of four accounts that hold assets in the seven-figure range, McHugh, of Charlotte, N.C., qualified for cheap $8 commissions at both brokerages. But he says the level of service he was used to at Harrisdirect suddenly disappeared. When he asked for the automatic dividend reinvestment to be halted in one of his accounts, he says, it took four e-mails and two telephone calls to complete his request. When he sought rebates promised him for trades in late January and early February, he had to look up his trade history and read it over the phone. "You send them an e-mail, and it's quicker watching girders rust than getting a reply from those people," McHugh says. "I'm not going to put up with this kind of nonsense." McHugh, a registered broker himself, plans to transfer his accounts to another firm.

McHugh isn't the only investor running into problems as the discount broker industry goes through one of the biggest waves of mergers in the industry's short history. In the fourth quarter of 2005 alone, mergers affected 3 million accounts and nearly half a trillion dollars in assets. The latest round of merger mania redrew the broker landscape: Ameritrade combined with TD Waterhouse to form TD Ameritrade, while E*Trade acquired Harrisdirect and then BrownCo. Transferring hundreds of thousands of accounts from one brokerage to another can be daunting, and the brokers going through mergers have taken heat from customers worried about glitches, poor service, and a new set of trading tools and commission levels.

Indeed, an annual survey from J.D. Power found that even though overall online-broker satisfaction was up slightly last year, each of the brokers involved in a merger had a lower score on the overall satisfaction index. Internet chat boards are packed with messages from angry customers grousing about being forced to switch firms.

Brokers argue that not everyone is losing out during the consolidation: For starters, the nearly $2 trillion in accounts at Fidelity and Schwab comprises 80% of the cash in discount brokers, and neither company was involved in a merger. Even at E*Trade, President Jarrett Lilien says the Harris takeover was the rare "perfect storm"; the merger was complicated by everything from software bugs to a surging market to differences in the cultures of the two brokerages. "Harrisdirect had much higher service levels," he says, "while E*Trade was more for the people who didn't need much help." Nor is the news for investors who do find themselves at a new firm all bad. Commissions at TD Ameritrade are now $9.99, much cheaper than the $17.95 for small investors at the old TD Waterhouse. Brown customers will soon be able to trade bonds online at E*Trade, which wasn't possible at their old broker. Then there's Warren Potas of Washington, D.C., who's used Waterhouse for years, enduring a Web site that works so poorly on his Macintosh he has to go to another site to get stock quotes. Potas says he is looking forward to trading from Ameritrade's platform and gaining access to a new set of tools.

Still, the picture may get worse before it gets better. Some industry experts say the current round of consolidation is just heating up. Joe Moglia, CEO of TD Ameritrade, told SmartMoney he expects to see only three large discount brokerages left when the mergers are finished.

What do all these changes mean for the consumer? The bottom line is that you may have to shop around — better that you choose a broker rather than allowing a merger to make the choice for you. That's where our survey comes in. We opened accounts at 14 brokers, where we bought and sold big stocks, little stocks, corporate bonds and covered calls. We pestered customer-service centers by phone and e-mail to see whether or not they could answer our questions, and how quickly. To get a real-world sense of how much you'll pay to trade a mutual fund, we found out who charges a hefty transaction fee for out-of-network funds. (Hint: Beware Fidelity and Schwab.) We pored over 1099 tax forms to see which had the information you need on Apr. 15; we checked account statements for readability; and we ran Web sites through their paces, grading them on ease of use and efficiency.

We also added a new variable this year: rates on cash. After the dramatic rise in short-term interest rates, payouts range from a stingy 0.95% (TD Ameritrade) to a stellar 4.77% (Vanguard). So make sure you ask for the best rate or transfer your cash to a high-yield money-market fund.

We based our rankings and the commissions we report below on a hypothetical buy-and-hold customer with an account of $50,000 who invests in stocks, bonds and funds and wants to write covered calls. That means our top-ranked site would not be the first choice, say, for a day trader or for someone who buys only mutual funds. Below are our results.

Next:


Premium Brokers4

Premium Brokers

Fidelity
For the fourth year in a row, Fidelity dominated the discount brokers in the premium category. With products ranging from cheap Treasury bond trades to precious-metals storage, Fidelity offers just about everything a penny-pinching trader could want. Customer service was excellent, and we were impressed with detailed responses to e-mailed questions. Fidelity investors have access to the company's 208 mutual funds (and 1,132 others) without a fee, but you'll pay a whopping $75 if you want to buy a fund outside the network. Also, if you have less than $50,000 in your accounts, you'll pay $19.95 to trade instead of $10.95 or less. And though we liked the "hypothetical trade" feature, which allows you to see what effect a trade would have on your asset allocation, we found it difficult to navigate back to the real transaction.

E*Trade
E*Trade is the product of at least 25 acquisitions, and while complaints from people like Keen McHugh show that some clients are not happy with their new broker, much of that griping may stem from resistance to change. There's a lot to like about E*Trade, including its intuitive trading platform and online tools. The cash "optimizer," for example, shows account holders how to reallocate cash to increase interest income and reduce payments. A new planning tool called a risk analyzer helps investors determine if their investment returns are worth the risk and weighs performance against relevant benchmarks. The company recently unveiled unlimited account protection that guarantees you won't lose any money from fraud. Where the firm falls down is customer service — for the second year in a row, we spent more than half an hour holding the line to speak with a customer-service representative. When we e-mailed with a question about money-market yields, E*Trade replied with the answer to an earlier question we'd asked about stock certificates. Lilien, the firm's president, says E*Trade plans to spend an extra $42 million on customer service this year.

Charles Schwab
Over the past year, Schwab took a long-overdue step: The firm finally got rid of its hidden $3 order-handling fees, which were tacked on to the commission of every stock trade. Now customers with $50,000 in assets pay $12.95 per trade (up to 1,000 shares). But mutual fund buyers look out: Some out-of-network funds carry transaction fees as high as $165. With almost 300 branches around the country (versus 110 at Fidelity and 267 at Scottrade), Schwab is a convenient place for banking and meeting with advisers. And despite the firm's discount roots, Schwab claims it can satisfy the full-service needs of the wealthy clients of a Merrill Lynch or UBS. "We're trying to improve and expand our whole business around personal service," Charles Schwab told SmartMoney. The Web site provides top-of-the-line Goldman Sachs research, as well as Schwab's own equity ratings, which rank 3,000 stocks with letter grades: A, B, C, D and F. Using the ratings, Schwab's financial consultants recommend individual stocks, which is a rarity in the discount-brokerage world. (Schwab doesn't rate its own shares, but gives E*Trade a "B.")

Banc of America
For several years, our survey has excluded the discount-brokerage arms of banks, mostly because these brokerages were expensive and bank sites seemed to be more focused on banking than trading. Really, the brokerages were afterthoughts. But now, in the wake of commission wars that have lowered trading costs for the entire industry, a couple of banks have started offering dirt-cheap commissions to investors who have a checking account at the same institution. With Banc of America (yes, the brokerage is spelled with a "c," not a "k"), you can get $10 commissions if you have a checking account, $7 if you have $50,000. Our trades were executed smoothly, thanks to remnants of the old Quick & Reilly brokerage, which was bought by Fleet Bank and then folded into Bank of America. A few things bothered us, such as the fact that some quote screens for stocks don't include the price/earnings ratio. And when we clicked the "help" button for information on limit orders, our search returned an article on investing in fine art. Not something we're looking to trade online.

TD Ameritrade
With its merger with TD Waterhouse, Ameritrade now finds itself in our premium discount-broker category. The two officially combined in April, and the premium features of Waterhouse will be phased in gradually. Ameritrade customers will have access to investing advice from Waterhouse, as well as 100 branch offices around the country, while Waterhouse customers will get a sleeker trading platform and much cheaper commissions. Trading is a breeze because a "snap ticket" at the bottom of the screen allows you to trade from any part of the Web platform.

WellsTrade
When it comes to branches, the discount brokerage units of banks have everybody beat: Bank of America has 5,800 in the U.S., and Wells Fargo, parent of WellsTrade, has 3,180. Like Banc of America, WellsTrade offers $10 trades to anyone with a checking account, and $250,000 in assets at the bank and brokerage qualifies you for 50 free trades a year. The WellsTrade trading platform was easy to navigate, and the only thing missing was online bond trading — you have to call the bond desk. One thing that disturbed us was that it is easy to click your way to the banking section of the Web site by mistake.

Vanguard
Vanguard is the pioneer of low-fee index mutual funds, which are frequently recommended in these pages. But once again, Vanguard brings up the rear of our premium discount category. The reason? The site caters to fund investors, and the company says customers typically don't use the trading platform for anything more than buying a couple of blue-chip stocks to supplement their Vanguard funds. So if that's your investing profile, then this is a fine choice. But if you plan to trade stocks and bonds, the site is unwieldy, and if you want to buy or sell a fund from any other fund family, you'll pay a $35 transaction fee.


Premium Brokers
Now competitive with discounters on pricing, but offering more features.
Broker Commission
($) Default
Rate
on Cash
(%) Mutual
Funds Investment
Products Banking
Amenities Trading
Tools Research Customer
Service Tax-Lot
Selector Real-Time
Web Chat 24/7 Telephone
Help Line Coverdell
Accouns Cust.
Service:
Avg. Time
on Hold* Margin Rate
on $10,000
(%)
Fidelity5 10.95 3.35 Y Y Y N 89 10.08
E*Trade6 9.99 1.00 Y N N Y 509 9.74
Charles Schwab7 12.95 1.03 Y Y Y Y 82 10.25
Banc of America8 7.00 4.26 Y N N N 92 9.35
TD Ameritrade9 9.99 0.95 N Y Y Y 302 10.00
WellsTrade10 9.95 4.43 N N Y Y 33 9.50
Vanguard11 25.00 4.77 N N N Y 67 9.50
* In seconds.


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Full-Service Brokers12

Full-Service Brokers

A broker used to be a guy who called once in a while with stock tips. Now he might very well be your insurance agent, your banker, your mortgage provider and your accountant.

While the discount brokers may be trying to increase their profits by consolidating, the huge full-service brokerage firms are making a new bid to get more of your money — by selling everything from loans and insurance to credit cards and estate planning. And as brokers increasingly act like complete financial advisers, they are getting paid like them as well. Instead of paying per transaction, more investors are opting for a fee-based structure, in which they pay a percentage of the value of their accounts. A 1.5% fee on a $500,000 account, for example, will cost you $7,500 per year. And the fee-based structure gives your adviser an incentive to make your nest egg grow: As you get richer, so does he.

But there's a big catch, and don't expect your broker to tell you about it. Even if he provides a financial plan for you, a broker is still a salesperson who is not legally required to act in your best financial interest. Traditionally, a person who gets paid a fee for providing a financial plan is required by law to act in your financial interest — legally, that adviser is called a fiduciary. But last year the Securities and Exchange Commission passed a rule that lets certain brokers provide investment advice for a fee without being held to the same legal standards as a financial planner. Traditional fee-only advisers, who are fiduciaries, have been up in arms over the rule. "You would not go to a doctor who also sells Merck products, or a lawyer who sells insurance," says Peggy Cabaniss, head of the National Association of Personal Financial Advisors. The brokerages insist that they are always looking out for their clients' best interests, regardless of how they are regulated.

Given all the changes happening in the relationship between investors and their brokers, trust is a crucial issue. And it's on the decline. Forrester Research recently asked customers if they agree with this statement: "My financial provider does what's best for me, not just its own bottom line." Four of the six brokerages surveyed saw a significant drop in the percentage of customers in agreement with that statement since the last survey. Edward Jones and Smith Barney held steady, while Morgan Stanley came in last, with just 29% of its customers agreeing with the statement.

In our rankings this year, the biggest was indeed the best. Merrill Lynch came out on top, thanks in part to an improvement in both customer satisfaction and trust scores over last year. And it's paying off for the company: The "Total Merrill" marketing campaign launched several years ago has been effective in grabbing a bigger piece of each household's financial pie by selling more loans, like mortgages and credit cards. "Merrill Lynch has been way out in front of the pack," says Chip Roame, managing principal of consulting firm Tiburon Strategic Advisors.

Smith Barney, which came in second, swapped its fund business for Legg Mason's broker network last year, in part to eliminate any potential conflict brokers may have faced when selling homegrown products. Edward Jones, which is the only broker not offering more products, slipped to No. 3 this year from the top spot, in large part due to stock picking, which fell from first to worst.

Bringing up the rear is Morgan Stanley, which is in the midst of a major effort to rejuvenate its struggling retail brokerage. During the first quarter of this year, its retail assets grew just 2% over the prior year, compared with double-digit gains for the other big firms. New CEO John Mack has promised to fix the retail division. Earlier this year it recruited James Gorman, a former Merrill Lynch executive who helped build that firm's retail operation. In his first few months on the job, Gorman fired unproductive financial advisers and trainees and announced plans to expand the ultrahigh-net-worth business and attract more funds into its sweep accounts. "We have good bones," Gorman told investors recently. "We just haven't made much of them."


Full-Service Brokers
Broker/
No. of Brokers Stock
Picking Customer
Satisfaction Trust Statements Accounts
Per
Broker Number of
Analysts
Merrill Lynch13/13,300 676 750
SmithBarney14/13,200 682 300*
Edward Jones15/9,500 790 28
A.G. Edwards16/6,800 NA 530 84
Wachovia17/7,900 537 75
Morgan Stanley18/9,000 500** 740
UBS19/7,500 NA 435 678
* Equity analysts only.
** Estimate.
Sources: Securities Industry Assoc.; Zacks Investment Research; J.D. Power; Forrester Research; Dalbar; SmartMoney Research


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Discount Brokers20

Discount Brokers

TradeKing
Beginner's luck? Perhaps. Our surprise winner in the discount category is TradeKing, which was launched in December by the same people who founded Suretrade, a dot-com-era online brokerage that was eventually acquired by Quick & Reilly (now part of Bank of America). With its $4.95 market and limit orders, TradeKing carries the banner of cheapest broker. The bare-bones trading platform was fast and easy to navigate. Getting answers from customer service through the online chat function was a breeze. TradeKing isn't perfect: You can't buy bonds online, and all funds carry a $14.95 transaction fee. And for some reason our "preview" screen was disabled, so we couldn't check orders before sending them. As a result, we accidentally bought the wrong stock during our testing. Lucky for us, that stock was Google, and it jumped 7% in short order.

Firstrade
Originally founded to serve the Chinese community in New York, Firstrade has been adding more and more features over the years, keeping its commissions at a low $6.95 per trade. That's less of a deal, however, now that competitors have lowered their commissions, and Firstrade's Web site has started to look a bit out of date. But with efficient bond trading and improved accounting software that's integrated into the platform, Firstrade has all the tools most online investors will need. The broker also offers extensive banking amenities including a debit card and online bill-paying services. Firstrade impressed us with prompt, informative responses to our e-mail and phone queries, but we were frustrated with the absence of a search box to help us find our answers online.

OptionsXpress
OptionsXpress topped our rankings when it debuted two years ago, but took a hit this year because stock commissions are still $14.95 even as competitors have lowered prices. But we still like its easy-to-use but sophisticated trading tools, the lack of any hidden fees, and the decent rate it charges on margin loans. In addition, the firm has added futures trading in the past year. We were not put on hold a single time during our five calls to customer service, though we were disappointed that one e-mail request went unanswered entirely. And we're still waiting to find out how to access the site from our mobile device. But that was a minor glitch — for self-directed investors interested more in stocks and options than in mutual funds, bonds and banking amenities, OptionsXpress is a good choice for an online broker.

Muriel Siebert
"Wow, you have a Treo 650? I'm very jealous. I only have a 600. I'm in the Stone Age." That's what a Siebert rep told us when we called customer service to ask about accessing the firm's Web site with a smart phone. But the "Stone Age" reference could just as easily apply to the Siebert Web site, which, even after improvements in the past year, is stuck in the late 1990s. That said, the site remains functional, and customer service is excellent. We got prompt, satisfactory answers when we called with questions, and our e-mails were answered in half an hour. Of course, in the age of TradeKing, Siebert's $14.95 commissions are a bit old-fashioned too, but founder and CEO Muriel Siebert told us that they're negotiable. And what customers lose on commissions they may gain in a high-yielding money-market sweep fund.

Scottrade
With its 1.7 million accounts, Scottrade seemed a prime acquisition target. But Rodger Riney, the founder and CEO, has refused to sell his closely held brokerage. Judging from letters we received from readers, the new Web site the firm introduced last year caught some clients off guard, but Scottrade has smoothed out the glitches, and customer service is still top-of-the-line. (During trading hours, calls are typically routed to the Scottrade branch nearest the client.) When we went to buy a corporate bond, we were disappointed that the firm had a $10,000 minimum. And though we were pleased Scottrade offers news from Dow Jones, we couldn't access company news from the quotes section — you have to go into a separate part of the Web site, which slows the process considerably.

Thinkorswim
Maybe they should have named the brokerage "sink or swim." When you want to trade a stock on this offbeat new site, there's initially no "buy" button. You just run your cursor across the "bid" price and click to call up an order ticket. A similar move is necessary to sell a stock. Making the strange interface even less user-friendly: There's no "help" button on the trading page. In fairness to the company, we should note that for this survey we evaluate Web-based trading platforms; most Thinkorswim customers actually use a software download that makes trading quicker and easier once you've figured out how to use it. Tom Sosnoff, CEO and founder of the Chicago-based broker, describes it as a boutique for stock and options traders. If you can get past the site's oddities, we'd say it's also a great place to buy mutual funds, because you can pick up to three funds each month with zero transaction fees. That means you could complete 36 mutual fund transactions a year for free. Customer service was great, and Sosnoff told us that his trading-support employees have a minimum of 10 years' experience on a trading floor.

WallStreet*E
Though it still ranks dead last on our list, WallStreet Electronica has made progress since it first appeared in our survey in 2001. One of the glitches we experienced that first year was that the Web site simply shut down one day; this year the phone went dead while we spoke to customer service. The rep said the company was having problems with its Internet phone line. Perhaps the oddest change to arrive this year on the site is a sultry female voice that greeted us when we logged on, said farewell when we logged out and notified us of executed trades. Francisco Otalvaro, the firm's president, said voice prompts were something that investors had requested; if so, then this broker's scrappy customers deserve their eccentric Web site. Commissions at WallStreet*E are cheap, even for small-time traders, thanks to a cap that limits commissions to 5% of the amount of the trade. We paid just $1.35 to trade one share of Microsoft. Now that's a discount.

Discount Brokers
Commissions continue to fall, even while tools and research improve.
Broker Commission
($) Default
Rate
on Cash
(%) Mutual
Funds Investment
Products Banking
Amenities Trading
Tools Research Customer
Service Tax-Lot
Selector Real-Time
Web Chat 24/7 Telephone
Help Line Coverdell
Accouns Cust.
Service:
Avg. Time
on Hold* Margin Rate
on $10,000
(%)
TradeKing21 4.95 4.16 Y Y Y Y 47 7.50
Firstrade22 6.95 2.50 Y Y N Y 111 9.00
OptionsXpress23 14.95 3.83 N Y N N 96 8.25
Muriel Siebert24 14.95 4.15 Y N N N 61 8.00
Scottrade25 7.00 3.00 N N N Y 39 9.95
Thinkorswim26 5.00 3.98 Y Y Y Y 8 8.25
Wall Street*E27 9.99 3.98 N Y N Y 7 9.50
* In seconds.



Links in this article:
1http://www.smartmoney.com/brokers/index.cfm?story=august2006&pgnum=2
2http://www.smartmoney.com/brokers/index.cfm?story=august2006&pgnum=3
3http://www.smartmoney.com/brokers/index.cfm?story=august2006&pgnum=4
4http://www.smartmoney.com/brokers/index.cfm?story=august2006&pgnum=2
5http://www.fidelity.com
6http://www.etrade.com
7http://www.schwab.com
8http://www.bankofamerica.com
9http://www.tdameritrade.com
10http://www.wellstrade.com
11http://www.vanguard.com
12http://www.smartmoney.com/brokers/index.cfm?story=august2006&pgnum=3
13http://www.merrilllynch.com
14http://www.smithbarney.com
15http://www.edwardjones.com
16http://agedwards.com
17http://www.wachoviasecurities.com
18http://www.morganstanley.com
19http://www.ubs.com
20http://www.smartmoney.com/brokers/index.cfm?story=august2006&pgnum=4
21http://TradeKing.com
22http://www.Firstrade.com
23http://www.OptionsXpress.com
24http://www.siebertnet.com
25http://www.Scottrade.com
26http://www.Thinkorswim.com
27http://www.wallstreete.com



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