Which Online Brokers Keep Clients Happy?

When investors' portfolios plunged last year, so too did their satisfaction with their online brokerages, according to a new survey. That's hardly a surprise -- people blame the weatherman for rain, too. But some brokerages held up much better than others, showing that when it comes to keeping clients happy, size, reputation and communication are key.

In SmartMoney’s own award-winning annual broker survey, customer service is consistently an important issue. (Our survey also evaluates brokerages on other factors, including commissions, research and trading tools. Read our 2008 rundown here.)

Now, key customer satisfaction benchmarks are showing signs of vulnerability at some online brokerages, according to the annual American Customer Satisfaction Index released on Tuesday by the University of Michigan and ForeSee Results, an e-commerce research firm. The nine-year-old study -- the largest of its kind -- measures customer satisfaction with the online retail, online brokerage and online travel industries. The collective e-commerce industry had a rough year as satisfaction fell 2%. Alas, it was mostly the brokers' fault.

The online financial services industry led the overall drop by a wide margin: Satisfaction plummeted more than 6% to 74 on a 100-point scale. That's the lowest reading since the bear market of 2002 when it hit 73. (The highest all-time reading of 79 came in 2007, during the peak of the bull market.) ForeSee Results says the online brokerage industry was hurt by the recession, concerns about the bailout, and the Bernard Madoff scandal. No doubt watching decades worth of life savings disappear made investors want to shoot the messenger, too.

"There’s certainly a loss of trust and confidence in the financial system," says Larry Freed, president and chief executive of ForeSee Results. "And watching their brokerage accounts drop in value every day obviously doesn't put people in a good frame of mind."

Fidelity and Charles Schwab (SCHW) each saw steep declines in their scores, but they held up much better than the rest of the industry. TD Ameritrade (AMTD) posted a whopping double-digit drop, but it still edged out E-Trade (ETFC), a perennial last-place finisher. (See table below.)

What separates the relative winners from the losers? The bigger, more established online brokerages seem to have done a better job of instilling confidence than the smaller, newer firms, Freed says. After all, the functionality and quality of brokerage web sites didn't get worse during 2008.

"More anecdotally than scientifically, it seems like Fidelity and Schwab stepped up and were quicker to communicate with their customer bases," says Freed. "Fidelity did conference calls and webinars, for example, to help clients understand what's insured and what's not or to reassure customers that something as simple as a money market was going to be OK."

If communication, responsiveness and hand-holding helped Fidelity and Schwab, what happened to TD Ameritrade? Company spokeswoman Kim Hillyer says clients remain the company's top priority in these unprecedented market conditions and that it increased its communication and education efforts.

As for E-Trade, Freed says it has always suffered from a customer satisfaction standpoint. Perhaps the stress of the last year has merely thrown its limitations into sharper relief. "Their clientele tends to be more midsize portfolios rather than higher-end, and that's going to cause many of those clients more pain relative to a higher-net worth customer," Freed adds.

E-Trade spokeswoman Tina Martineau says the online broker has doubled down on its investor education and outreach efforts, among other initiatives. She also pointed out that even during extreme levels of volume and volatility the broker didn't have a single down trading day in 2008.