BUSINESSWEEK ONLINE : MAY 22, 2000 ISSUE
COVER STORY Clicks of the Trade Need a Web broker? Here's our evaluation of 10 popular sites Competition among online brokers is running at a fever pitch. More than 160 Web brokers are now vying for your investment dollars, ranging from no-frills Datek to the sites of full-service houses including Morgan Stanley Dean Witter and Merrill Lynch (page 150). With so many online brokers around, how do you choose the right one? This is a critical question. Half of American households now have money in the stock market, and more than 16% of all U.S. equity trades are made online. Stephen Franco, a managing director of U.S. Bancorp Piper Jaffray, estimates that in the six months ended Mar. 31, online trading volume jumped 69% as Web brokers added some 2.5 million new accounts. To help you pick a Web broker, our team of editors at Business Week Online looked at 10 of the most popular ones (table, page 156). All but one--Merrill--have won high marks from Gomez Advisors, a consulting firm in Lincoln, Mass. Merrill's online service, which made its debut in December, 1999, is too new to measure formally, but we included it because the brokerage house is ubiquitous. We divvied the 10 brokers into pairs of similar sites so we could do side-by-side comparisons. Here's what we found. (For more extensive reviews of the brokers, visit www.businessweek.com/investor/.) SINK OR SWIM. While self-directed trading is becoming a reality for an increasing number of Americans, most have little experience in the ways of Wall Street. The question of investor education reared its head the moment we tried to open an online trading account. Brokers make it extremely easy to open an account but don't always make it clear just what you are getting into. Perhaps some firms hope you'll be confused enough to pick up the phone and start talking with a human broker. Online firms provide you with an application at their Web site, but in most cases you have to send the form back by mail, with your signature and a check. You can't start trading until the check clears and the money is in your new online brokerage account. That delay is wise: It discourages impetuous trading and gives the customer some time to think before purchasing shares. But two firms, American Express (www.americanexpress.com) and DLJdirect (www.dljdirect.com), let you complete their applications online and begin trading within half an hour. You don't have to send them a deposit first, and the only personal financial information either demands is your salary and an estimate of your net worth. Using your Social Security number, however, each will run a quick electronic check with a credit service, such as Equifax, and extend you a line of credit of up to $15,000 to cover trades in case your check doesn't arrive within the three-day settlement rules of the Securities & Exchange Commission. Interest on the credit lines isn't prominently displayed, and credit terms are buried in the customer agreements, documents written in legalese that new customers must accept, by clicking on a box, before they can begin trading. Those Amex clients who do read the agreement will find the interest schedule, buried on page 8, to be a bewildering range of percentages to be added to an undisclosed ''base rate,'' depending on the amount of money in an account. DLJdirect's schedule, on page 9 of its customer agreement, is simpler, however. The terms of margin loans for buying shares on credit are equally opaque. Investors must apply for margin accounts separately. But neither broker's customer agreement explains how margin loans work or what the inherent risks are in borrowing to buy stock. This is a big deal, of course, when stocks fall rapidly. In March, as Nasdaq plunged, some brokers had to sell stocks from customers' accounts to meet margin calls--repay their debts, in plain English. It's no surprise to anyone who has shopped for an online broker that price-cutting is rampant in the business, with some sites even offering trades gratis. The American Association of Individual Investors estimates that between 1997 and the beginning of this year, the average online broker's commission fell from $34 to $18. The cheapest trading among sites we surveyed can be found at no-frills broker SureTrade (www.suretrade.com), a favorite of the day-trading crowd. For just $7.95 you can execute a market order, one that will be filled at the best current price a broker can get. A limit order (page 168), which puts a ceiling on how much you are willing to pay for a share of a given stock, costs $9.95. SureTrade has plenty of competitors near its price point, including Ameritrade (www.ameritrade.com), which charges $7.95 for a market order trade, and Datek (www.datek.com), whose tab for each market or limit order is $9.99. Other brokers confused us with Byzantine fee structures. Among Merrill Lynch (www.ml.com), Charles Schwab (www.schwab.com), and Morgan Stanley Dean Witter (www.msdw.com), it's hard to say who's cheapest. All offer $29.95 trades, with no advice, for individual stocks. From there, however, the price depends on your trading frequency or the size of your account. The general rule: The bigger your account or the more often you trade, the better a discount package you'll get. The lowest commission in this group is Schwab's $14.95 per trade, for clients who do more than 60 trades a quarter. By comparison, $14.95 is the most expensive commission at E*Trade (www.etrade.com). STIFF FEE. The menu of commissions at the high-price group of brokers was confusing, at best. You've got to read the fine print at Schwab, for example, to discover you will pay a $40 annual fee on an individual retirement account of up to $10,000. That means if you put the $1,000 minimum into an IRA, you're paying 4% just to let your money sit in Schwab's coffers. Trading costs? They're extra. Schwab's pricing makes discount broker TD Waterhouse (www.tdwaterhouse.com) look more attractive. Its online brokerage charges no fees for an IRA and a $12 commission for any trade of up to 5,000 shares. If you want research along with your account, the first place to look is the full-service brokers. With huge teams of analysts in-house, they can offer their own research on just about anything. Merrill Lynch and DLJ give the best value of all the surveyed brokers, making the full line of their well-respected research available to any online client at no extra charge. Morgan Stanley Dean Witter also offers sound research, but it charges $10 per month for reports on up to five stocks to account holders with less than $100,000 in their accounts. That's chintzy. It also undermines the whole exercise of self-directed investment, unless you're willing to keep a fat balance in your account. Successful trading depends on information. The last person who should be limiting the flow is your broker. Cheaper brokers, such as E*Trade and SureTrade, offer research from other sources, such as Zacks Investment and Standard & Poor's (like Business Week, a unit of The McGraw-Hill Companies). But if you want investor education along with company research, none of the reviewed sites delivers. Grudging kudos go to Amex for trying the hardest; Merrill for its concise answers to frequently asked questions; and DLJ and E*Trade for clear explanations of how to use their sites. But all needed to do better. Take American Express. It offers 10 different financial-planning tools on its site, under the heading ''resource center.'' One tool, called Equity Portfolio Evaluator, assesses the sector weightings of your portfolio to see if you're too exposed to a particular kind of stock. We were singularly unimpressed when the tool lumped Microsoft, Motorola, and CMGI into the same industry category and then advised us that the portfolio had too much exposure to electronics stocks. The three are quite different companies; the categories are too broad. CHOOSE A NUMBER. Another tool, called Road Map to the Future, is intended to help investors plan for everything from how to pay for their own weddings, their kids' educations, and their retirements. The road map is graphically interesting, right down to the direction signs you click on to move through the program. However, using the planner requires some macroeconomic knowledge you may not have: You can't get off the first page without giving an estimate of your ''long-term'' inflation expectations. You must choose a number between 2% and 6%--and Amex never defines what long-term means. Nonetheless, estimating the future inflation rate is useful, since it determines, among other things, nominal interest rates and the discount rate you use to calculate the present value of a company's future earnings per share and, thus, stock-price returns. But few of us have the economic sophistication to make such guesses. Even Alan Greenspan has trouble getting it right. Most of the other sites don't even go that far to educate customers. Simple explanations of trading jargon, such as ''stop loss order'' or ''mark to market,'' are distressingly difficult to find. Brokers should check out the idea of providing a hyperlink or a pop-up explanation at the spot where such jargon appears. The explanation should be in plain English and should help you understand its implications for your investment strategy. Indeed, DLJdirect recently added a link to an SEC explanation of margin trading--a commendable move. Many of the broker sites could also improve their looks. We particularly disliked Ameritrade's unexciting screens, with lots of gray space. Compared with DLJdirect's more exciting green-and-gold format that makes navigation a breeze, Ameritrade's pages are about as exciting as old-fashioned punch cards. But just as competition has forced online brokers to sharpen their pricing, it should also impel them to upgrade content and appearance. ''Our site changes every day,'' says American Express spokeswoman Linda Finnerty. As good as the sites are, they could be even better. For investors, any improvements can only be a good thing. Best Bets The cheapest trading among the surveyed sites was at no-frills broker SureTrade, where $7.95 will execute a market order that will be filled at the best current price a broker can get By MARGARET POPPER With Stefani Eads, Sam Jaffe, Alex Salkever, and Amey Stone _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP					RELATED ITEMS Clicks of the Trade TABLE: And the Winner Is... How We Reviewed the Sites See also our reviews of 10 online broker sites: E*Trade and Ameritrade Daytek and SureTrade Schwab and TD Waterhouse DLJDirect and American Express Online Morgan Stanley and Merrill Lynch INTERACT E-Mail to Business Week Online

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