If you run an Internet search for "online brokers," you'll be overwhelmed by the number and variety of sites that come up. There are brokers to suit just about every investor taste, from the first-time investor to the sophisticated derivative active trader.
But if what you want is a "jack-of-most-trades," you'll find that five brokers stand out among the rest. I call them the "Fab 5." These are the brokers I feel provide the best overall experience for the general investing populace (see description below) and more than sufficient products and tools to satisfy this clientele.
Many factors need to be considered when choosing an online broker. As $10-$20 trading commissions become the norm, brokers are working to differentiate themselves in areas of customer service, research tools, product offerings, trading execution technology and site usability.
As a result, there are online brokers to suit just about every investor taste, though you must decipher which is best for you.
The following reviews are intended to help you do just that.
Charles Schwab
Many words come to mind when I log onto the Schwab site: clean, elegant, and impeccably designed. Navigating this site is seamless and elicits that seldom found welcoming feeling at an online broker site, whether you're a novice, or a high-end full service customer.
Schwab does an excellent job focusing on the customer, recently launching 24/7 phone support to go along with their market-leading investor retail locations (270 plus) and e-mail services. In terms of planning tools, Schwab provides many bells and trinkets tailored to the buy-and-hold investor, including the asset allocation and diversification monitor, retirement planning tool, and a quarterly portfolio profile report that compares your portfolio's performance against industry benchmarks.
On the research side, Schwab offers premium reports ranging from a variety of Argus tools - "Model Portfolios" offering six hypothetical actively managed portfolios designed for different types of investors; "Market Watch" highlighting market movers and key market statistics; "Update," which lists the top 30 evolving stocks - to Goldman Sachs PrimeAccess Research.
On the mutual fund front, Schwab offers the greatest number of non-transaction fee (NTF) funds (referred to as the Schwab One Funds) with more than 2,000, but ranks only fourth out of the five in terms of total funds offered (5,300+).
The transaction fees for non-NTF funds are among the highest at 0.70 percent of principal value buy/sell with a minimum transaction fee of $49.95 and a maximum of $164.95.
E*Trade Financial
The epitome of electronic trading, E*Trade continues to transcend itself, most recently venturing into banking and personal finance. The recent site overhaul produced a sleek new front page dubbed E*Trade Complete, which conglomerates and highlights all your accounts - from banking and credit cards to investment accounts and mortgages.
One of the gems on this front page is a feature known as "Quick Transfer," which allows customers to electronically link to external bank accounts and seamlessly transfer cash into and out of any E*Trade account. For those preferring to deposit in person or have face-to-face customer support, E*Trade is actively working to expand the number of its walk-in retail centers (currently at 15+ locations), although they admittedly lag in this area relative to the other four brokers on this list.
On the investment front, an E*Trade standard account for investors with less than $50,000 is reasonably priced (ranking third out of the five) in terms of equity market and limit commissions at $12.99 (those with more than $50,000 in assets enjoy more competitive rates). But it may be worth the slight premium considering that E*Trade offers great content such as its "trading ideas" section, listing daily pre-screened stock ideas (powered by ClearStation) based on a slew of technical and fundamental indicators.
If it's a basket of securities you seek, E*Trade not only offers every tradable ETF, but a fair number of mutual funds (7,000+, ranking third among the "Fab 5"), of which more than 1,000 are non transaction fee funds (ranked fourth of the five), or simply referred to as NTF funds.
A transaction fee fund consists of fund families that do not participate in a broker's no-fee program and, as a result, require customers to pay (much like a commission when buying a stock) a specified amount when buying or selling. Although E*Trade doesn't offer the most funds over all, or NTF funds for that matter, the site clearly differentiates itself (along with Scottrade) by charging only $24.95 per buy/sell for non-NTF funds. All in all, E*Trade is an excellent one-stop shop for a plethora of financial products, while providing an interface that is intuitive and easy to use.
Fidelity investments
From the site's wide array of third-party research providers to its own top-notch planning tools, Fidelity has found a way to distinguish itself from the pack.
Research partners include Ativo Research, Channel Trend, Decision Economics, Lehman Brothers, Prudential Equity Group, and more. Fidelity's own nifty "Portfolio Review" diagnoses your portfolio and then creates investment strategies for your lifetime financial goals, and its "Investment Growth Calculator" displays how different factors may affect the growth of your investments.
Another differentiating area for Fidelity is in customer service, where employees who field questions have a portion of their compensation tied directly to how well they satisfy customers.
Of the five online brokers, Fidelity offers the fewest number of funds at 4,500+ and is third in NTF's offered at 1,100+. And its $75 transaction fee to purchase/sell non-NTF funds is exorbitant compared to similar sites. The high fees could have the effect of persuading brokerage accountholders to buy Fidelity Funds instead, and perhaps this is not unintentional.
The site ranks last of the five in terms of equity commission rates, with its "Bronze" (standard entry level account) and "Silver" (assets between $50,000 and $999,999) packages charging $10.95 and $19.95 respectively.
In the end, Fidelity's vast array of analytics and planning tools more than offset slightly higher than average commissions, especially for those who are research oriented.
Scottrade
Plain and simple, Scottrade is the Southwest Airlines of online brokers, mimicking the "no frills" philosophy of the air travel provider.
If your sole interest is to trade stocks or options, Scottrade is the online broker for you. This site continually leads the pack by offering one of the lowest, "no frills" commissions in the industry: $7 flat fee regardless of the number of shares bought/sold or the dollar value in your account.
Other than TD Ameritrade, nearly all brokers, including the other three on this list, have some form of a tiered commission structure based on either the dollar value of your account, trades executed within a specific timeframe, or number of shares purchased.
Scottrade is extremely light when it comes to research or planning tools. Still, the site attracts trading enthusiasts and novices alike not only with low commissions, but with its low minimum investment requirements ($500, placing them second in this group of five) and comprehensive mutual fund offering (9,000+, placing them second in our group).
Speaking of mutual funds, Scottrade ranks last among the "Fab 5" in terms of NTF funds offered (850+), but makes up for this in the form of an industry-leading $17 buy/sell transaction fee for non-NTF funds. Another element about Scottrade that I love is their integration of Gainskeeper, an accounting application that concisely summarizes your tax exposure at the end of the year. Gainskeeper is the perfect complement to an online broker that has customers who trade a bit more (and consequently have more gains and losses to keep track of) than elsewhere.
A final note: Although Scottrade has good execution services and low prices, its overall site seems a bit rough around the edges even after a recent redesign. Despite some of their deficiencies, however, Scottrade satiates its core audience and then some as exemplified by a sixth JD Power & Associates award in the area of "highest in investor satisfaction with online trading services."
TD Ameritrade
Generally speaking, TD Ameritrade's business model bears many similarities to that of its rival Scottrade. Like Scottrade, TD Ameritrade offers flat-fee equity commissions at the higher rate of $9.99 regardless of the number of shares bought/sold or dollar value in account.
TD Ameritrade's "no frill" commissions are among the simplest and lowest in the industry relative to competitor standard accounts, but they are still almost 43 percent higher than Scottrade's $7 rate.
Since TD Ameritrade seems to target its services more toward the active trader audience, investment research is scant, except for a few research reports provided by the likes of Morningstar, S&P, and MarketEdge Opinion.
For the trading enthusiast, TD Ameritrade offers a couple of interesting "toys" at no charge, including the "Command Center Screen" allowing customers to view their holdings, balances, and six indices in streaming real-time,and the "Market Motion Detector," which identifies short-term trends through analysis of price and volume.
Perhaps most impressive about TD Ameritrade is its ability to offer an unprecedented 13,000+ mutual funds (by far the most on this list or any other for that matter), which may be attributable to the TD Waterhouse-Ameritrade merger.
TD Ameritrade ranks second out of this list of five in terms of NTF funds offered with 1,300+. However, there is a whopping $49.99 charge for transaction fee funds.
Explanation of review criteria
By "general investing populace," I mean investors who meet the following criteria:
- Experience: Novice to fairly advanced
- Methodology: Buy-and-hold; long-term diversified
- Products: Combination of stocks, mutual funds, ETF's, and occasionally options
- Investment Capital: Under one million dollars to invest; most in the $1,000 to $100,000+ range
(Active traders (day traders), futures enthusiasts, or technical option strategists can find better resources elsewhere.)
Below is a general guideline matrix highlighting possible online broker options taking into consideration dollars available to invest.
| Online Broker | Mutual Funds | NTF Funds | Options | Minimum Investment | Retail Centers | Customer Service |
|---|---|---|---|---|---|---|
| Fidelity | 4,500+ | 1,100+ | Yes | $2,500 | 100+ | 24/7 |
| Schwab | 5,300+ | 2,000+ | Yes | $2,500 | 270+ | 24/7 |
| E*Trade | 7,000+ | 1,000+ | Yes | $1,000 | 15+ | 7 a.m. - 12 a.m. EST |
| TD Ameritrade | 13,000+ | 1,300+ | Yes | $1 | 100+ | 7 a.m. - 12 a.m. EST |
| Scottrade | 9,000+ | 850+ | Yes | $500 | 269 | Local retail center hours |
| Online Broker | Mutual Fund Transaction Fees | Commissions | Maintenance Fees | ||
|---|---|---|---|---|---|
| Market | Limit | Options | |||
| Fidelity | $75 | $20 | $20 | $12 + $0.75 | None |
| ($50K-$999K) | $75 | $11 | $11 | $11 + $0.75 | None |
| Schwab | $50-$165 | $13 | $13 | $10 + $1.40 | None |
| ($50K-$999K) | $50-$165 | $10 | $10 | $10 + $0.75 | None |
| E*Trade | $25 | $13 | $13 | $13 + $1.25 | up to $40/qtr. |
| ($50K+) | $25 | $10 | $10 | $10 + $0.75 | None |
| TD Ameritrade* | $50 | $10 | $10 | $10 + $0.75 | None |
| Scottrade* | $17 | $7 | $7 | $7 + $1.25 | None |