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Choosing the best
online brokerage for you
By • Bankrate.com
 Stock
market ups and downs be damned -- plenty of people are taking their
financial fate onto their own keyboards by using online brokerage
accounts.
A new study by eMarketer says Americans have
opened 13 million brokerage accounts online. That number will skyrocket
to more than 31 million accounts by 2004.
Bankrate.com wants to help you sort through
the clutter if you're looking to jump into the fray. There are,
after all, more than 100 online brokerages -- and there are plenty
of differences among them.
We surveyed 25 of the biggest and best-known
online brokerages. We compared everything from the minimums to open
an account to fees for limit orders and mutual funds.
We compiled fees for trades made by touch-tone
phone and trades made with the assistance of a broker. We also tested
the service you'll get when you contact the brokerage either by
phone or through e-mail.
Here is a synopsis of what you'll find in the
charts of the Bankrate.com online brokerage survey.
Minimum to open
Unless money is no object, one of the
first things you'll want to know is the minimum amount needed to
open an online brokerage account. Twelve of the 25 companies don't
require a minimum. Of those that do, Brown & Company, which
targets experienced investors, is the highest at $15,000. Most call
for between $500 and $5,000.
Maintenance fees
Only four of the brokerages -- American
Express, T. Rowe Price, Fidelity and Charles Schwab -- charge a
fee to maintain the account. All of these waive the fee if you make
a certain number of trades per year or maintain a balance that can
range from $5,000 to $25,000. Fidelity charges $15 per quarter on
inactive accounts.
Be aware that brokerages charge a variety of
additional fees depending on what you need to do within your account.
Services that entail fees include: wire transfers, returned checks,
legal transfers, certificate delivery, special registration of stock
certificates, stopping a check and duplicate copies of statements.
Read the Web site carefully for a complete list of all fees.
Online market and limit
orders
Generally, the cheapest way to trade is
by placing a market order online -- meaning you'll accept the going
price for the stock. Brown & Company is the cheapest at $5 for
up to 5,000 shares. Several brokers charge $29.95 -- the top rate
in our survey. A few have no limit on the number of shares you can
trade for that amount, but most limit the transaction to 1000 or
5000 shares.
Two-thirds of the brokerages charge the same
for a limit order -- you specify a price at which you will buy or
sell -- as they charge for a market order.
Keep in mind when you trade that most brokerages
will charge a commission on both the buy and the sale.
Touch-tone trades
If you get a hot stock tip while away
from your computer, in most cases you can pick up a touch-tone phone
and buy or sell. Some brokerages won't hit you with a higher fee
than for online orders -- but more than half will charge anywhere
from a few dollars extra to more than double the online order fee.
Datek, Mydiscountbroker and Merrill Lynch Direct don't offer touch-tone
service.
Live broker
Placing an order through a living, breathing
broker is the most expensive way to trade. At Fidelity, for example,
the fee for trading 100 shares online at the market is $25. That
same trade through a live broker will cost $59. All the brokerages
charge more for live-broker service than they do for online trades
and most charge more than for touch-tone trades. About half the
brokerages surveyed give you access to live service and sales support
24 hours a day; the rest have limited hours.
Mutual funds
The Bankrate.com survey looks at three
categories of mutual funds and allows you to compare the fees side-by-side.
The three categories are No Transaction Fee (NTF) funds, and two
categories of non-NTF funds -- load and no-load. Some brokerages
have minimum purchase requirements for all funds, some just for
funds from outside their fund family.
NTF funds:
Customers aren't charged a fee to buy or sell unless the fund is
sold prematurely. Instead, the fund families pay a fee to the online
brokerage.
However, some brokerages will charge a redemption
fee if you don't hold onto the fund for a specified period.
The amount of time you need to hold the fund so as not to trigger
the fee varies from brokerage to brokerage, as does the fee itself.
For example, Mydiscountbroker doesn't charge
an early redemption fee, while Morgan Stanley Dean Witter charges
$25 to sell a fund held less than 30 days and Vanguard charges $50
or 1 percent to sell a fund held less than one year.
Some brokerages -- Brown & Company, Scottrade,
Ameritrade, Datek, Web Street Securities, Merrill Lynch Direct and
A.B. Watley -- don't offer NTF funds.
Most online brokerages offer hundreds if not
thousands of funds. Not all are listed on their sites. It's smart
to contact the company by e-mail and get the specific fees in writing.
Non-NTF
No-Load: Funds that don't pay a fee to the online brokerage
but allow the brokerage to impose transaction fees to cover its
costs. However, there are no sales commissions to pay in purchasing
these funds.
With these funds, there is no charge if you
buy directly from the company -- for instance, buying a Janus fund
from Janus. But since you're buying it from a different online brokerage
you'll pay a transaction fee. Obviously, it may pay to shop around
and see if you can buy the fund direct or, perhaps, through another
online brokerage that charges a lower fee.
Transaction fees for buying non-NTF no-loads
range from $9.99 at Datek to $75 at Fidelity and Mydiscountbroker.
Likewise, transaction fees to sell non-NTF no-loads have just as
wide a range.
Trading funds within the same family is called
an exchange. Firms that don't charge to exchange within the same
family are Suretrade, Datek and Quick & Reilly. Web Street Securities
doesn't charge a fee if the trade involves more than $500.
Non-NTF
load funds: Funds that don't pay a fee to the online brokerage
but allow the brokerage to impose fees to cover its costs, and also
charge a sales commission -- called a load. Loads are generally
a percentage of the purchase price.
In other words, if you pay $1,000 for a fund
with a 5 percent load, only $950 will be used to purchase shares
in the fund. The other $50 goes to the fund or broker as a commission.
Again, not all funds are listed on the brokerage sites. Transaction
fees for buying and selling non-NTF load funds and for exchanging
within the same family vary widely. Make sure you see fees in writing
before investing.
Walk-in branches
A few of the brokerages have an extensive
network of walk-in branches. Generally, if you have an online account,
the most you can do at the branch is drop off checks and securities
rather than mailing them. If you think you want to use a branch
for additional services, be sure to ask about fees.
Customer service/sales
support
What happens when you have questions and
need to call or e-mail the brokerage? Are your questions answered
promptly and correctly? If the person who answers the phone doesn't
know the answer, do they quickly route the call to someone who does?
Unfortunately, our survey found a mixed bag of results in this area.
Just about every brokerage we surveyed has a
voice response unit (VRU) answering your call. You're given a menu
of options and you punch a number to get to the person who, supposedly,
can best help you.
Bankrate.com researchers posed as customers
who were interested in opening an account, had seen the Web site,
but had questions about things such as fees, minimums and mutual
funds.
For the most part, calls were answered quickly
and reps were courteous and interested. However, the skill level
and knowledge of the front-line people answering the phones varies.
In some cases, TD Waterhouse for example, reps aren't allowed to
handle questions about mutual funds.
At National Discount Brokers, our question about
mutual funds was transferred to customer service. One customer service
rep answered incorrectly and then transferred the call to a mutual
funds "expert."
Mutual fund questions presented the most problems.
Karen Christie, director of research at Bankrate.com, says there
were so many unusual and non-standard answers that e-mail response
was tested to resolve the issues.
Brokerages were asked what the transaction fees
are to buy, sell or exchange a non-NTF no load and a non-NTF load
fund.
In their response to our e-mail, Mydiscountbroker.com
said customers couldn't buy mutual funds online, only through a
broker -- even though the Web site says you can purchase mutual
funds online. They gave us a phone number to talk to a broker. The
broker confirmed that the company's Web site is wrong about buying
mutual funds online.
Bruce Zucker, president of Mydiscountbroker.com,
says that up until a month or so ago customers could buy mutual
funds online.
"It's a temporary problem. We're implementing
a new software package and the mutual fund module of that package
is still in development. We hope to have it up and running in 60
to 90 days."
Nevertheless, as Christie points out, the Web
site should have been corrected.
"When you get hold of the broker and he
says to you, 'The Web site is wrong,' what does it do to you? It
makes you feel uncomfortable with the other answers you've received,"
says Christie.
DLJDirect responded to our e-mail inquiry within
one business day, but it took several additional e-mails to get
a complete answer to our question. DLJDirect vice president Craig
Dedrick says he suspects someone misinterpreted the question.
"That's one of the reasons we provide
the ability to talk to us over the phone and talk to us through
e-mail," says Dedrick. "Customers will contact us through
e-mail having written a particular question they thought they were
getting an answer to and the person responding to it was, perhaps,
reading into it. We pride ourselves for our quick response time
and for hanging with the customer until they have their answer."
Muriel Siebert, of Muriel Siebert & Company,
says she found it incredible that two e-mails we sent to her company
still weren't answered several days later. The Web site says e-mail
will be answered within two business days. Siebert promised to look
into it and a couple of days later Ron Bono, vice president of operations,
called to say they had done a complete search -- "high and
low" -- and couldn't find our e-mails.
"All e-mails we recognize as incoming get
responded to promptly -- within 24 hours at the latest," says
Bono. "We have a team of experienced, licensed personnel that
respond to e-mails. We take that very seriously."
After discussing the e-mail situation with Siebert,
our research department sent four additional e-mails to retest the
system. Those e-mails were responded to within two business days.
Muriel Siebert says her company is in the process
of moving its new accounts department to New Jersey and phone calls
may have been routed to the wrong place.
Two brokerages that fared very well in customer
service -- Ameritrade and Accutrade -- are related. They're both
subsidiaries of Ameritrade Holding Corp. According to senior vice
president Pete Ricketts, the companies pride themselves on fast,
reliable customer service.
"The customer may call us only once a year,
but that one time is the opportunity we have to validate their choice
of Ameritrade or Accutrade."
Bottom line
The bottom line when it comes to online
brokerage accounts is this: do your homework before signing up for
an account. Just as you would research a stock before buying it,
be sure to get your ducks in a row before opening an online account.
Know what you want from the service:
- Is it important that you be able to talk
with a live broker -- or are low minimums and low fees higher
on your priority list?
- Do you want to be able to reach a rep by
phone 24 hours a day, 7 days a week?
- Will you need the brokerage to wire funds
or deliver certificates?
If you're new to online trading -- or to trading
stocks at all -- keep in mind your needs may grow as you become
a more experienced investor. It's a good idea to print hard copies
of the brokerage's fee information. If you're uncertain about anything,
e-mail the company and get an answer in writing.
Bankrate.com will update this survey on a quarterly
basis.
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