So you want to pick an on-line broker. These days, the Internet offers as many trading choices as cable television offers channels.
By a recent federal count, at least 157 on-line brokers are vying for more than $415 billion in on-line accounts. Many sport suggestive Internet addresses such as www.trade4less.
com, www.swiftrade.com, www.investexpress.com and www.trutrade.com.
Even the full-service firms, including Merrill Lynch & Co. Inc., have jumped into the low-cost on-line brokerage field.
Plenty of rankings are freely available on the Internet to help people shop. But anyone looking for an answer will be disappointed: The rankings disagree.
Heavily advertised E*Trade Securities Inc. leads one list, but lesser-known Muriel Siebert & Co. tops another. Charles Schwab & Co. may be the biggest on-line broker, but it landed among the bottom ranks in a comparison at Kiplinger.com.
At best, these rankings help investors distinguish among the brokerages’ strengths and weaknesses.
Shopping begins with a thorough self-examination.
“Whenever somebody is trying to pick a broker, that’s the most important part. They have to honestly assess what kind of investor they are,” said Dan Burke, senior analyst at Gomez Advisors Inc., a leading evaluator of on-line sites.
Then comes the arduous task of comparing commissions, extra and extraneous features, reliability and customer support.
But what none of the on-line brokers do–at least not yet–is link investors directly with Wall Street. Your order still goes to the broker who executes the trade.
Even automated execution systems leave investors vulnerable to the unpredictable technology of on-line brokerages. Federal regulators say many consumers lodge complaints about accessing their accounts.
Mark Lynch first went on-line two years ago. The Army captain in Leavenworth, Kan., signed up with Charles Schwab.
“I heard that they had an electronic trading capability, and they were a big name,” Lynch said.
Schwab is the biggest. Its on-line accounts represent almost one in four on-line brokerage customers, according to midyear estimates by U.S. Bancorp Piper Jaffray.
But among on-line brokers, Schwab is one of the costliest. And that made it a poor choice for Lynch, who was making plans to trade stocks aggressively.
Lynch had read a book called “Day Trade Online” (John Wiley & Sons, $29.95) that convinced him he could beat Wall Street at its own game. As his trading began in earnest, Lynch felt stung by Schwab’s $29.95 commission per trade.
Seven months ago, he switched to Firstrade Securities Inc., identified by the most recent Gomez rankings as having the lowest overall cost. Lynch now can do the same trades for $6.95 each.
Lynch’s switch, however, meant giving up some bells and whistles.
“They’re extremely non-service-oriented,” Lynch said of Firstrade. “You just buy and sell stocks through them.”
At Schwab, Lynch was able to tap funds in his on-line account simply by writing a check. At Firstrade, he has to arrange either a cashier’s check or an electronic funds transfer.
Lynch says he hangs onto his Schwab account mostly so he has access to a toll-free telephone number for real-time stock quotes. These are stock prices as they happen.
Like Lynch, Channing Smith focused largely on price when he opened an account with Datek Online Brokerage Services in May. But Smith, who is Lynch’s neighbor, plans a rather quiet account.
“I’m not doing a whole lot of trading. I’m basically sitting on them,” said the family-practice doctor.
Datek got his business because it offers free research, such as price charts, news reports and a consensus recommendation from analysts checked by First Call.
“There may have been one or two cheaper, but they didn’t have the free research,” Smith said.
There are other more fundamental issues to check.
The Motley Fool’s Internet site suggests getting a sample account summary and sample year-end statement to find out what information your on-line broker will provide free of charge. Otherwise, you might be short critical information at tax time, it said.
It’s easy to see why identifying the best on-line broker depends on whom you ask.
Gomez issues an overall ranking of on-line services.
Gomez also issues four other rankings designed to appeal to different types of investors. Its rankings for the “hyper-active trader,” who wants a simple interface with the broker, vary noticeably from those for the “life-goal planner” who wants tools for financial planning. Two other rankings are intended for the “serious investor” and the “one-stop shopper.”
If there is one thing on-line brokers deliver, it’s a cheap trade.
Even the most expensive ones charge commissions that are a fraction of what a full-service broker will charge. And if you want any brokerage firm’s lowest commission, including a discount broker’s, you will have to do business on-line.
The bad news for investors is that price cuts that ruled the first two years of on-line brokering seem to be fading. Average commissions for the 10 largest on-line brokers have leveled out at just under $16, according to quarterly averages calculated by Credit Suisse First Boston Corp.
Still, that average masks a considerable range. Brown & Co. offers one type of trade for only $5. It would cost $8, $9.99, $12, $14.95, $20 or $29.95 at other sites, according to a comparison in Fortune magazine’s Investor’s Guide 2000.
But comparing on-line trading costs is a bit more complicated than that.
For starters, you’ll have to know what type of order you’ll be using before you can compare commissions. That $5 Brown trade, for example, is for a market order.
A market order tells the broker to buy or sell at whatever price the market offers. This can be risky in a fast-moving market, especially if the on-line broker’s system is experiencing delays.
Protection comes by using a limit order, which tells the broker to buy or sell at the stock price specified by the customer or at a more favorable price.
Some firms charge the same price for limit orders and market orders. But Brown’s limit orders cost $10, or twice its market order cost.
And there are fees to ask about.
An early 1999 review of 72 on-line brokerages in Computerized Investing from the American Association of Individual Investors included a check for startup fees, maintenance fees, access fees and execution fees. None of the on-line brokers had all of these, but seven sites had one of them.
Investors also should check whether the site provides real-time stock quotes free and whether there are limits on the number of quotes you can check.
If picking a broker isn’t easy, the work also doesn’t end with the first choice. Government reports have noted rapid changes in the industry and have made recommendations that could lead to changes in regulations and disclosures by on-line brokers.
One report, for example, suggests standardized disclosures or third-party reviews of brokers’ technology performance and customer services. Investors can get at least a measure of this from Gomez Advisors at www.gomez.com.
