In its original incarnation as a discount broker, Charles Schwab & Co. built a reputation for serving the little guy. Subsequently, fast-growing online broker TD Waterhouse has built its reputation by following Schwab's lead -- and charging less. Waterhouse may have found a formula that will work, as Schwab apparently has set its sights on richer customers who can live with higher minimum account balances and fees.
Factor in the complexity that Schwab has introduced with Byzantine fee structures, and these days newbie online traders might do better at Waterhouse. In fact, this reporter, who has been a loyal Schwab customer, was dismayed at how poorly the bigger company
compares with the Canadian upstart.
Let's compare commissions, for starters. At Waterhouse (www.waterhouse.com), the fee is
$12 for any trade of up to 5,000 shares. At Schwab (www.schwab.com), trades of up to
1,000 shares cost $29.95, unless you're a hyperactive trader (read: day trader). Then Schwab will lower your commission to $14.95.
HEFTY PENALTY.
So much for Schwab's reputation as the automatic choice for small investors. More disconcerting is the difference in the two companies' account fees. An IRA at Waterhouse comes with no fee and requires no minimum balance. Schwab, by contrast, has always charged a maintenance fee on IRAs, which it recently doubled. Schwab now takes a $40 annual cut of any regular IRA account with less than $10,000 in assets. That fee can be waived under several circumstances (if direct monthly deposits are instituted or if it's a joint account with a balance of more than $50,000). Still, for someone opening an IRA with the minimum balance of $1,000, the regular fee amounts to a 0.4% penalty for no other service than holding your money.
As for usability, the sites come out fairly even. Setting up an account at either requires mailing in a signed document, and neither will let you start trading before you deposit a check into your account. Schwab's account setup process takes seven screens, Waterhouse's a few more. Waterhouse has no account minimum for IRAs and a $1,000 minimum for a regular brokerage account. Schwab has a minimum of $1,000 for IRAs and $5,000 for traditional brokerage accounts. (College Saver accounts have a $500 minimum.)
Margin accounts are easy to set up on both sites. Schwab posts a big warning about margin volatility at the top of its trading page, which is clean and minimal but not entirely obvious. It has no hyperlinked explanations to somewhat arcane market terms, such as stop or limit orders. And even though Schwab lets customers trade options, the explanation of how to do so is cursory at best. The Waterhouse site is marginally easier to navigate.
HIGH-ROLLER BUMP.
Both sites makes a commendable effort to educate investors about the basics of investing. But they skip the inherent dangers of online trading -- such as that once a market order is placed, you may end up buying the stock at a price much higher than you expected when you logged the order. Still, both sites offer standard-issue investment materials: Waterhouse offers free earnings estimates from Zacks Investment Research and free research from Standard & Poor's. Both sites charge for higher-powered analysis (though not much -- usually no more than $5).
For upper-tier investors, Schwab starts to look a bit nicer. Fees conveniently disappear, and investors with assets in the six figures are automatically bumped up to Schwab's Signature Service tier at no extra charge. That means a special phone line and faster trading software. Waterhouse, by contrast, doesn't have a skybox for rich folks.
Both offer the option of talking to a live person. And the people who execute trades don't collect the commission themselves, so sales pressure is nonexistent.
On the whole, customer service is pretty responsive at both shops. But during the times when you may need to speak to a human the most -- meaning, during big dips in the market -- expect long waits to get through. Moreover, performance at both Web sites drops off during ugly market sessions when orders fly.
FLAK ATTACK.
In the last market downturn, in mid-April, horror stories about Waterhouse filled the message boards of Yahoo! and Raging Bull. Schwab, likewise, got some flak from investors' attorneys for failing to protect its customers from themselves.
The bottom line? Both sites are relatively easy to use, and both companies are visitor-friendly. Customer service at Schwab might be a tad better. But is it worth the higher fees and trading costs? That's your decision.
Copyright 2000 , by The McGraw-Hill Companies Inc. All rights reserved.
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