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When a bank gets gobbled up by a competitor, customers often end up paying higher fees and are required to keep bigger balances. Airline mergers usually result in higher fares and fewer flights. But so far the consolidation among online brokerages hasn't been too hard on customers. According to Needham (Mass.) research firm Tower Group, the business has shrunk from 154 players in 2000 to about 60 today. Yet for some customers, fees are down. Clients of the former TD Waterhouse, now TD Ameritrade, pay stock-trading commissions of $9.99 instead of as much as $17.95 before. Other investors are being offered a wider range of services. Customers of Brown & Co. and Harris Direct, both acquired by E*Trade, now also have access to bank accounts, home mortgages, and financial advice.
Indeed, there's still plenty of competition among the remaining online brokers, and new ones, such as Sogoinvest, joined the crowd just days ago. Want to compare commissions? Rates on margin loans? Costs to invest in mutual funds? They're all in the table on page 64, along with results from the most recent J.D. Power & Associates (MHP) rankings of overall customer satisfaction, which are based on customer surveys. (J.D. Power, like BusinessWeek, is a unit of The McGraw-Hill Companies (MHP).)
Who's the best to do business with? That depends on what you want from a broker. Do you value cheap commissions, fastest order execution, or the biggest menu of mutual funds? Or maybe you don't have a strong preference and just want an e-broker that does an all-around top job.
Perhaps the best broker for the money is Scottrade, where a stock trade costs just $7, period. Many brokers have tiered pricing that rewards active traders or wealthier investors with lower rates. And even the cheapest brokers often charge a penny or two a share when an order is more than 1,000 or 2,000 shares. Scottrade charges only $17 for a mutual fund trade, vs. $35 at many brokerages. Those trades are free if they involve one of Scottrade's 893 no-transaction-fee (NTF) funds.
Still, what gives the company an edge over even lower-cost competitors is its 272-branch network, with offices in 47 states. If you're having any kind of problem, instead of waiting to reach a call center, you can drop into an office. "That personal relationship with our reps is very important to our customers," says Chief Executive Rodger Riney.
The combination of low cost and extra service has earned Scottrade the J.D. Power customer satisfaction award for six years in a row. Moreover, CEO Riney is adamant about bucking the industry's consolidation wave and keeping Scottrade independent. Because the company is private, Riney is under no pressure from public shareholders to do otherwise.
MUTUAL FUND INVESTING
Firstrade charges $6.95 a pop for all stock trades. But it charges nothing to trade mutual funds. That includes offerings from such low-cost fund families as Vanguard and T. Rowe Price (TROW) that almost never wind up in brokers' no-transaction-fee programs because they won't pay the fees those programs require.
Thinkorswim, a broker that offers $9.95 stock trades, also charges nothing for fund trades as long as you don't make more than three per month. Beyond that the charge is $15 per transaction.
E*Trade provides another perk to fund investors. For funds that levy marketing fees on shareholders known as "12(b)-1 fees," the brokerage will rebate half that amount to investors in those funds.
At ShareBuilder, "you can literally open an account with $10," says CEO Jeffrey Seely. No minimum investment, no extra account fees. ShareBuilder's automatic-investing program is great for a newbie's savings discipline. For $20 a month you can make 20 automatic stock or exchange-traded fund (ETF) purchases. For $12 a month you get six trades. The drawback: Sharebuilder generally places all of its automatic trades just once a week, on Tuesday mornings. That might be fine for someone who's accumulating stocks and planning to hold them for a long time. But if you'd rather have your order filled immediately, it can cost as much as $15.95. In that case, a better option may be the just-launched Sogoinvest.com, which has a similar automatic-investment plan that charges just $3 for real-time trades.
Talk about cheap: At Interactive Brokers, a stock trade costs 0.5 cents a share, with a minimum of $1 a trade. That's below what most institutional investors pay. The catch is that the firm charges a $10 monthly maintenance fee if you don't spend at least $10 trading. But for many investors, the $120 minimum annual cost is well worth it. According to the J.D. Power survey, the average online investor made 36 trades in 2005, up from 23 in 2003. Even at Scottrade, 36 trades amounts to $252 a year, more than double Interactive Brokers' $120.
For active investors, the margin rate -- what it costs to borrow from the broker to leverage your holdings or sell stocks short -- may also be an important factor. Every broker has a tiered pricing system for margin loans, with larger amounts getting the best rates. Here again, Interactive Brokers has the best deal: just 7% for borrowings of $100,000 or less and as low as 5.5% for $3 million or more.
BREADTH OF PRODUCT
If you want one-stop shopping for your entire financial life, you're better off with Charles Schwab (SCHW) or E*Trade (ET), where you can have your bank account, mortgage loans, insurance, estate planning, and financial advice all in one place. The advantages: one statement instead of many, sim- pler data collection at tax time, and an easier way to develop a comprehensive financial plan.
For depth of research, Fidelity Investments is tops with its vast array of analysis and investment tools. The research comes from 13 firms from big names, like Lehman Bros. and Standard & Poor's (MHP)(like BusinessWeek, a unit of The McGraw-Hill Companies) to the lesser known, like Channel Trend, a stock-rating service.
Schwab's research is not as diverse, but it does have a proprietary stock- rating system that has trounced the Standard & Poor's 500-stock index since its May, 2002, introduction. Merrill Lynch Direct's (MER) research is proprietary, too, produced by one of the world's largest investment research teams.
A few years ago, when interest rates were lower, no one would have taken note of the rate a broker paid on cash balances. But now, with short-term rates more than four percentage points higher, yield can influence where you choose to take your business. A yield difference of just one or two percentage points can amount to thousands of dollars a year depending on the amount of cash you have in your account. Idle cash in Vanguard Brokerage Services automatically goes into the Vanguard Prime Money Market Fund (VMMXX), which currently earns 5%, making it about the most attractive deal around. With a $5 million balance, the yield is 5.2%.
Other brokers have a tiered interest rate system that depends on your account size. On balances of $10,000 or more, for example, Interactive Brokers pays 4.8%. Accounts with less than $10,000 earn nothing. At Scottrade, $1 million accounts get a 4.3% yield, while those with under $1,000 earn only 1.8%.
Whichever broker you choose, ask about how cash is treated. At Muriel Siebert, T. Rowe Price, and Vanguard, for instance, cash automatically goes to a money market fund. At others, such as Schwab, E*Trade, and TD Ameritrade, you need to specifically instruct the firm to sweep your cash into a money market fund. Otherwise it will sit in a cash account, with the yield determined by the firm, not the market. Those yields may be only around 1%.
If you want 1,000 shares of a stock currently trading from $10 to $10.05 a share on the New York Stock Exchange (NYX), does your broker get them for you at $10, $10.05, or somewhere in between? The answer can cost or save you a lot more than the commission you paid.
Yet determining the quality of a broker's execution isn't easy. It took CEO Alan Shapiro of Transaction Auditing Group (TAG), an execution-tracking firm, two full days to gather data on and analyze the brokers in our table.
One key execution statistic, Shapiro says, is price improvement, which means getting a better price than the best bid (the price a broker will give you if you're selling shares) or the offer (the asking price if you're a buyer) on an exchange-listed stock. In the previous example, a broker who is able to get shares of the stock for $9.99 for a buyer or $10.06 for a seller would be improving the price by one penny. Not a lot, but if you trade enough and in large enough quantities, it adds up.
Another stat to consider is the fill rate for limit orders -- those for which you set a price to buy or to sell, and the trade is made only if the price is met. Then there's speed. Did you have to wait more than 10 seconds to get your shares? If you did, the stock may now cost $10.15 instead of $10.
By those standards, Schwab offered investors the best execution in NASDAQ-listed stocks during the first quarter of this year, according to TAG. For regular or "market orders," Schwab gave investors price improvement on 62% of their trades, vs. 41% for the average broker in the group. The firm also had a 75.4% fill rate for limit orders and executed 98% of its trades in less than 10 seconds, compared with just 53% and 94%, respectively, for the average firm. For NYSE-listed stocks, Firstrade and Scottrade were better at improving prices for their customers.
By Lewis Braham