And the winner is ...
Actually, it's not quite that simple. Now in its 19th year, our annual survey of discount and full-service brokers has always been more like an entertainment awards show than the Super Bowl, with a range of competitors sharing the podium. Best customer service? Lowest commissions? Best research help? The winners in six different categories get a moment in the spotlight--and the losers get some attention, too.
The Tony-Oscar-Emmy approach is our way of reflecting the ever-changing nature of the brokerage business--especially today as the stock market sputters and Main Street investors look for a happier ending to their own financial scripts. And it's safe to say that plenty of investors have been yelling "Get me rewrite!" since the financial crisis convinced them that their brokers weren't getting the job done. Americans have moved more than $100 billion into online brokerage accounts in the past two years, with much of that coming from full-service brokerages. At the same time, brokers of all stripes have been losing ground to independent financial advisers. Bill Doyle, an analyst at Forrester Research, says competition to keep those investors in the fold is driving brokers to constantly adapt their business models: "The ante is being raised by everybody."
For years, brokerages sweetened the pot by lowering their commissions and fees, but at this point, they can't go much lower. (In our survey, the average price for a basic stock trade was $8.27, down just 2 percent from last year.) The industry's newest gambit, analysts say, is a move to the middle, as brokers tailor their offerings to so-called mass affluent investors, the industry's term for customers with between $100,000 and $1 million to invest. That's a 40 million person demographic in other words, a jackpot and to hit it, brokers are giving midmarket customers some of the perks that used to be reserved for the wealthiest clients, such as access to more retirement specialists and admittance to more educational seminars. In an era when many investors are spooked about stocks, brokerages can't be "just a trading platform," says David Lo, the director of investment services at J.D. Power and Associates. "Investors are looking for more."
To rate the strengths and weaknesses of the discount brokers, we looked at a wide range of factors. Among other things, we analyzed data on the performance of the stocks they recommended, examined the range of investment products and research tools they offer, consulted experts who study important factors like the speed and reliability of their websites, and conducted our own tests on the responsiveness of their customer service. We used a curve system to determine star rankings for six categories of fees and services. To obtain overall rankings, we gave different weight to those categories, putting a special emphasis on customer service and fees.
Our survey, which itself has been ranked best in breed by the website ConsumerSearch four years running, begins in earnest early in the year. We sift through questionnaire responses from brokerages, checking out their newest services, tallying fees (hidden and otherwise) and evaluating their consumer-friendliness. This year, for the second year in a row, our top discount broker is Fidelity, the industry giant with $3.5 trillion in assets; it won on the strength of its huge and fast-growing selection of investment options and a speedy, reliable website. On the full-service side, it's Raymond James, which narrowly won the field with strength in several categories, including stock-picking. But plenty of other contenders have also earned a little red-carpet attention this year. Our results follow.
Commissions & Fees
Brokerage customers have clamored for cheaper online trades ever since, well, the dawn of online trading. And they've largely gotten what they've asked for. In 1997, Charles Schwab charged a base rate of $29.95 for an online stock trade. Today that figure is $8.95. But cost-conscious consumers aren't necessarily satisfied: SmartMoney and research firm Synovate recently found that more than 8 percent of online brokerage customers had switched companies within the past 12 months in search of lower fees and commissions, with an additional 14 percent considering the same move. Of course, commissions don't tell the whole cost story. Experts say many brokers are making up the revenue with more fees for common services, such as transferring balances or closing an account. Indeed, recent fee increases outnumbered decreases by more than two to one. "The nuisance fees aren't going away," says James McGovern, a vice president at Corporate Insight, a financial-services consulting firm.
For keeping a lid on ordinary fees and nuisances alike, ShareBuilder handily wins this category. The broker's base price for an online trade is $9.95, but investors actually pay an average of $6, thanks to perks like discounts for frequent traders. Scottrade and Vanguard are also top performers in the cost-control category. OptionsXpress and Merrill Edge, the new discount broker that has replaced Bank of America's old brokerage Web platform, are two brokers whose extra fees have put them at the pricier end of the spectrum. Both, for example, charge customers to close an IRA. An executive at OptionsXpress says the firm frequently waives this fee for customers who maintain a "meaningful balance" with the company. Alok Prasad, the managing director at Merrill Edge, says the brokerage has a "tiered" commission structure, and indeed, some customers do get better deals. The site charges $8.95 for stock trades a big improvement over the $14 charged by the bank's old site and customers get a passel of free trades if they keep $25,000 in cash at the bank and broker combined.
Like many online-brokerage customers, Carol Clemens likes being able to step into a branch to deposit checks or ask questions. So the Edmond, Okla., retiree was elated when Scottrade opened a new branch near her home, eliminating the need for her to drive half an hour to the one in Oklahoma City. "I like being able to meet someone face-to-face," she says. These days, discount brokers are trying to re-create that interpersonal experience in many other forums not just in branches but through call centers, online chat forums and even Facebook. Amid the market turmoil of the past few years, analysts say, these contact points have been especially crucial, giving brokers a chance to smooth ruffled feathers, even when unhappy clients are contemplating leaving. "They don't want to leave a bad taste in their mouths," says McGovern. "If customers are dissatisfied where they go, they can always come back."
The best firms in this category allow investors to contact them whenever and however they like, and they offer quick and thorough answers. Our winner, for the second year running and by a wide margin, is TradeKing. The people at this five-year-old firm communicate with customers a lot, from its blog-happy CEO to the customer-service reps who respond to calls and e-mails with lightning speed. (The firm answered one call in 36 seconds, less than half the average time it took brokers in our survey.) TD Ameritrade was the other top firm in this category. When we e-mailed its customer-service department late on a Friday, no less it replied in 33 minutes. Who disappointed? E-Trade and Merrill Edge. Neither allows prospective or existing customers to e-mail questions without being logged in to an account a cumbersome and sometimes illogical extra step. And ShareBuilder took more than four days (counting Saturday and Sunday) to respond to one e-mail. ShareBuilder President Dan Greenshields says the company shuts down its customer service over the weekend in order to keep fees and commissions low. "We're just like certain airlines that only give peanuts," he says.
For years, discount brokers have been loading up their websites with information to help customers make investment decisions, ranging from educational videos to market commentary on executive blogs and analysis from research firms like Standard & Poor's, Ned Davis and Morningstar. The new frontier in this area is social media: Most of the firms in our discount-broker survey are hosting conversations about investing ideas on Facebook and Twitter, while a growing number are setting up similar forums on their own websites. Scottrade even has a social-media forum in Chinese. Most of this vast library of investor geek-speak is available for free, but the brokers that offer it aren't exactly channeling Mother Teresa. The Synovate poll found that half of self-directed investors use these tools, and among those who do, nearly 85 percent say it has prompted them to take investment actions thus generating fees and commissions. Providing research also helps brokerages stay "sticky": Clients who view videos or use asset-allocation tools on their brokers' sites are less likely to shop around for a better deal, says Lo, the J.D. Power investment analyst.
Charles Schwab, last year's winner in this category, has spent heavily on investor education; it has tripled the number of seminars it hosts in its retail branches, to 9,000. But E-Trade knocked Schwab from the top spot this year, by a narrow margin. The firm has made it simpler for investors to customize the research and tools they see online, and it has introduced a new social forum called E-Trade Community. At the bottom: Sharebuilder, which in keeping with its bare-bones philosophy, lacks some popular research widgets like a bond screener or a tool for assessing the riskiness of a portfolio.
Marc Greendorfer feels conflicted. The San Ramon, Calif., attorney has been a loyal Schwab brokerage customer for nearly 25 years. But he's also an avid user of his Android smartphone, and he can hardly believe that Schwab still hasn't created an app that lets him trade and monitor his account. "That's weird, because I thought Schwab was an innovator," he says. A spokesperson says Schwab plans to release an Android app later this year. But Greendorfer's dissatisfaction shows how quickly brokers can fall behind the technology curve. Most discounters spent huge sums over the past year rolling out apps for smartphones and tablet computers, like the iPad or Samsung Galaxy. (Scottrade alone plans to launch apps for the iPhone, Android and BlackBerry this summer.) TD Ameritrade already has two apps for the iPad, one for frequent traders and one for less-trigger-happy investors.
Although the number of investors hard-core enough to place trades from smartphones is still small, experts say those investors tend to be active and lucrative traders. Mobile trades more than doubled at TD Ameritrade last year, to around 4 percent of the total; while TradeKing says they surged to 3 percent of trades on the day after February's Presidents' Day holiday. "People were traveling, so they were away from their home computers, and there was a lot of volatility in the Middle East," says Don Montanaro, TradeKing's chief executive officer. For this crowd, speed is of the essence, so it's worth noting that OptionsXpress, Schwab and Fidelity have the fastest mobile apps, with average response times of around three seconds, says website-monitoring firm Gomez.
For those trading the old-school way, on computers, many online brokers now have two websites one aimed at buy-and-hold investors that might feature, say, advice about how to allocate the assets in a portfolio, and another for active traders who need less guidance. Of course, spiffy trading tools are of no use if the trading isn't fast and easy, so SmartMoney asked Gomez to test how rapidly customers can place trades on these sites. Fidelity, the fastest, clocked in at less than four seconds. Vanguard was the clear laggard. It took more than 18 seconds on average to place a trade. Vanguard also lacked some trading tools that many competitors feature, including multiple order entry and trailing stop-loss orders. A company spokesperson says Vanguard is "actively looking at ways to expedite the trading experience."
Mutual Funds & Investment Products
Within the wood-paneled halls of the Yale Club in midtown Manhattan, it's not unusual to find a former president giving a speech, or a tasting party enjoying $200-a-bottle Madeira. But earlier this year, a crowd gathered in the posh setting to listen to something different: a seminar from Fidelity, one of dozens the discounter has held since January in New York City alone. And the topics were anything but basic; on the Yale Club menu, next to the fruit tart, were discussions about preferred stocks and municipal bonds.
It's all part of a broader push among brokers to satisfy customers who believe they need more than a savvy stock strategy to thrive. Online brokers have ventured into Wall Street big-shot territory, offering items ranging from corporate bonds to initial public offerings to, more recently, foreign currencies. Granted, some esoteric investments are typically available only to investors with larger accounts. And while experts applaud the broader range of investments, they also point out that many of the sexier choices hit investors with hefty commissions.
In recent years Fidelity, TD Ameritrade and Charles Schwab have finished nose and nose in this category. All three brokerages sell thousands of mutual funds, a smorgasbord of government and corporate bonds, stock options and commission-free ETFs. Fidelity edged past Schwab this year to regain the top spot in part by getting global. Fidelity's customers can trade stocks listed in 12 foreign countries, from Australia to Portugal; and unlike at its competitors, they can do it online, without having to call a broker. They can even leave the cash from foreign-stock sales in the local currency so they can reinvest it without paying exchange rates. ShareBuilder is the straggler in this category, selling far fewer funds than competitors and selling only municipal bonds not Treasurys or corporates. Greenshields, ShareBuilder's president, says keeping things simple is part of being a low-cost broker.
Stephen E. Schwartz doesn't see much need for a bank anymore. The Clifton, N.J., attorney mails deposits to his Schwab brokerage account and withdraws the money at automated teller machines. Schwab reimburses him for any ATM fees, whether he's traveling in Israel or using a no-name cash machine in Coney Island. "My broker has become my bank," Schwartz says. That kind of talk is music to the ears of brokerages, of course; for years, they've been rolling out banking services whose fees can help offset the lower trading commissions they earn during down times. (And those fees can add up quickly: If customers want a debit card for some brokerage accounts, for example, they can wind up paying as much as $50 a year, plus $1 for every ATM withdrawal.) Not to mention, a banking relationship makes it more cumbersome for a customer to leave.
Still, some of the brokers' deals are competitive with their bank-only brethren. Fidelity wins the banking category, but only by a hair most of the contenders in our survey now offer a full suite of services, including credit and debit cards and online bill pay. Some offer relatively high yield savings and checking accounts, catering to customers who are fed up with the low interest rates currently on offer at traditional banks. For example, investors can earn 0.25 percent in a checking account at Schwab bank and transfer it to a linked Schwab brokerage account for trading the same day.
Of course, not every brokerage aims to do it all. "We don't want to be a bank," says David Cermak, a principal at Vanguard. Vanguard limits many of its banking services, including ATM cards and online bill pay, to customers with at least $500,000 in Vanguard funds or ETFs and even then it does not reimburse the fees charged by ATM owners. Cermak says many banking services are loss leaders for some online brokers, adding, "If we lose money, it impacts Vanguard fund shareholders."