SmartMoney's Annual Broker Survey

IT'S BEEN 20 MINUTES and still the "live chat" option with online broker WallStreet*E has failed to respond. "Thanks for your patience," we are told often, before we give up. "An operator will be with you shortly." Still searching for strong service, we move on to OptionsXpress, which promises reliable phone reps to answer questions. But when we start asking questions, our representative is of little help. We are told to read more on the firm's Web site. Well, thanks.

You know the story. You love your broker; you hate your broker. You wonder if there's anyone better. And in the agonizing market of 2008, those feelings can swing as quickly as your portfolio, diving with each market swoon and stumbling back with each rebound. Indeed, by all accounts brokers are under more pressure this year — from the market, from spooked customers and from each other as they work overtime to swipe customers from rivals. And while subprime woes at E*Trade's banking unit gave that firm an extra dose of bad publicity, the entire group is under the gun. The industry says service is getting better — and can point to some surveys for evidence — but don't tell that to an investor stuck on the phone trying to get help with his account. "I made three phone calls and had to deal with three different customer-support people before everything was fixed," says Robert Killen, a computer engineer for AT&T.

Each year we take an in-depth look at the industry's performance, and it wasn't long before we noticed something new: a blurring of the lines between key players. For years online brokers could be divided into two camps — discount brokers known for cheap trades but not much else, and "premium" discount brokers with higher prices but more products and services. Now that's pretty much out the window. Scottrade may be a discount broker, but it's also opening new branches at a furious pace, giving it more outposts than Charles Schwab. And some traditional "premium" discount brokers now rival discounters when it comes to price: The average commission charged by discounters like Firstrade is about 15 percent less than that of premium players like Fidelity, down from nearly 50 percent just four years ago. "We're all in this arms race," says TradeKing CEO Don Montanaro.

This blurring of the brokers can give savvy investors more leverage. In San Diego Mark Kundinger says he likes his Charles Schwab account for its free checking that comes with decent interest rates on cash deposits. But the 32-year-old banking-software expert thinks some of Schwab's mutual fund selections are "mediocre" compared with those of another firm he uses — Schwab archrival Fidelity Investments. Meanwhile, he's on the hunt for a broker who will give him free trades in ETFs. He's not the only one with divided loyalties: Research firm TowerGroup has found a steady increase in the number of accounts per customer, to a current average of more than 2.5 for each investor. According to David Lo, director of investment services at J.D. Power, customers keep 62 percent of their assets with their primary online broker; the rest goes somewhere else.

For our 16th annual survey, we ditched previous groupings of discount and premium brokers and assembled one list of the best and worst online brokers. But since investors have specific needs, we came up with winners and losers in six categories, too. We didn't change our usual rigorous analysis, using a combination of outside research and our own. That includes our usual paces: opening accounts, noting how long it took to find certain information, and evaluating Web sites for their research, navigation and trading tools. And as WallStreet*E and OptionsXpress discovered, we also put customer service through the wringer by calling and e-mailing questions to each firm. The rankings and commissions we report are based on a customer who trades up to 20 times a year with $50,000 in a brokerage account.

Best: Interactive Brokers
Worst: WellsTrade

If you're working with a discount broker, commissions are probably important to you. They're also pretty critical to the discount-broker industry, which has accumulated more than $3 trillion in investor assets over the past three decades. Firms like Ameritrade and Charles Schwab got their start pitching low fees. But in recent years even the discounters have made it all a little confusing, with commissions that vary by the frequency of trades, number of shares and even price of the shares. In Boca Raton, Fla., Killen, already unhappy with some service snafus, says E*Trade charges him $9.99 — so long as he makes 30 trades every three months; his coworkers who trade less frequently pay $12.99. Yet to knock his price down to $6.99, Killen says he'd have to make 500 monthly trades. "I was never going to make it," he says. So he opened an account at TradeKing, which charges him $4.95 regardless of how often he trades. But there's an exception to the budget pricing. The firm charges a penny a share for stocks under $2, so buying 5,000 shares of a $1 stock can set you back $50.

While online brokers don't exactly broadcast these kinds of details, you can find them in fine print on their Web sites, usually below the rate chart. We also looked at how much the companies charged for broker-executed trades and found that the gap can be huge. Broker-assisted rates for the same equity trade can range from $4.95, at TradeKing, to $112.50, at Fidelity. Even discount player Muriel Siebert charges $60, though Siebert, the firm's CEO, shares a little secret: "We negotiate." Only two firms don't offer trades through a broker: ShareBuilder and Interactive Brokers. But that didn't stop Interactive from scoring the best overall in this category. The reason: few account fees and rock-bottom commissions ($2.50 for 1,000 shares).

A better price is, well, no price. Zecco Trading doles out 10 free equity trades each month for investors with as little as $2,500, while linking a bank and brokerage account at Banc of America or WellsTrade gets up to 360 and 100 free trades per year, respectively. Otherwise, expect commissions to start at $14 at Banc of America and $19.95 at WellsTrade. (That price, plus other fees, puts WellsTrade at the bottom in this group.) Executives at both firms say most investors have bank accounts with them, giving them discounted or free trades.

Best: TD Ameritrade
Worst: Zecco and SoGoTrade

As American investors get savvier about researching investments on their own, the smartest brokers are getting better at helping them. Good thing. Research firm J.D. Power says customers rank decent research ahead of things like trade execution and customer service when it comes to determining overall satisfaction. In fact, the firm says 2007 was the first year online brokerages became the primary source of information for customers looking to make investment decisions.

Among the new bells and whistles: The "quotes and research" section of E*Trade's site includes links to outside experts who provide intraday commentary on stocks and sectors, and the firm's bond and mutual fund centers have been redesigned so that clients need less time to find advanced charts and screeners. While Fidelity earned high marks for the most in-depth research, from analyst reports to news on industry sectors, TD Ameritrade rose to the top. It scored well for having tools like its new "portfolio planner," which lets you manage where your investments get allocated. Its site was also the easiest and quickest of the bunch to navigate.

It took significantly more time to search through Muriel Siebert's Web pages. Of course, that could be because we've been waiting — and waiting — for the firm to roll out that new site it showed us when we conducted last year's survey. The firm says it's finally coming and that it's adding a few new features at a time. "Frankly, I got sidetracked" adding security features to the site, says Siebert. "I was responsible for some of the delay." While it took us less time to search the sites at SogoTrade and Zecco, these firms got some of the lowest scores for their research. Neither offers customers analyst reports, bond screening or portfolio-analysis features. Executives of both firms say they plan to roll out new research tools later this year.

Best: E*Trade and TD Ameritrade
Worst: ShareBuilder

Not long ago it was enough for a discount broker to offer swift executions of trades. But in these days of instant everything, that's not nearly enough for sophisticated traders looking for an edge in a cutthroat trading environment. Both TD Ameritrade and E*Trade — last year's champ in the premium category of our survey — provide customers with the ability to receive breaking financial news on thousands of stocks. They can also check their account balances and make trades over a smartphone. For investors who want their own personalized stock ticker, TD Ameritrade, E*Trade and a growing number of competitors also offer streaming of real-time quotes across the computer screen.

Want some company? The social-networking area on TradeKing's site includes a blog where the firm's "trading coaches" analyze trades made by other members of the online community. "Nice job!" TradeKing's Nicole Wachs wrote in a recent post, congratulating a customer for making a "solid profit." Still, some of the firms we studied offered fewer than half of the 13 tools we were looking for — WellsTrade, Zecco and, at the bottom of the list, ShareBuilder, which doesn't have much more than a dividend-reinvestment program. While the firm's CEO, Dan Greenshields, says that mobile access to trading will be available via BlackBerry in the future, a lot of the other tools we inquired about are "geared toward a heavy trader. That's just not our customer."

In the end, of course, the quality of trades counts. So this year we teamed up with Gomez, a Web site-monitoring company, to calculate the average time it took to log in, fill out and preview a trade order in 2007. TD and E*Trade had a virtual tie, at just under five seconds each. Scottrade clocked in at a swift four seconds, but others took a lot longer — 21 seconds in the case of WellsTrade. Jeff Cornman, a WellsTrade executive, says recent improvements have cut the response time to 16 to 17 seconds.

Best: Charles Schwab
Worst: SoGoTrade

Good news for investors, whether they're partial to mutual funds or just getting into the stock market game: Over half the firms we surveyed scored four or five stars in this category. They did so by offering the majority of the investment products on our checklist plus thousands of mutual funds. Fidelity edged out Schwab with its overall selection of funds — a mind-boggling 15,186, compared with Schwab's 13,021. Fidelity also had more than three times as many funds that it sells under its own name. But Schwab offers more no-load and no-transaction-fee funds, and Andrew Seleksi, a senior vice president, says the firm doubled its number of proprietary funds since 2006, to more than 140. And while both of these premium players provide customers with everything from access to IPOs to U.S. Treasury bonds, Schwab offers Coverdell education savings accounts, a product Fidelity lacks.

Other companies also had robust product offerings. But they ranked behind Schwab because they had a disproportionate number of mutual funds that carry a sales load, and they carried virtually no proprietary funds. The companies say there's a good reason for that. A spokesperson for TD Ameritrade says it tries to remain "unbiased," while Scottrade's director of online financial services, Kevin Dodson, says his firm doesn't try to steer customers to particular products: "We look at ourselves as a supermarket of funds instead of trying to get private labels to our customers."

Some smaller players turned in mixed results. Muriel Siebert offers an impressive number of mutual funds — thanks to a deal with Fidelity that allows it to distribute that firm's funds. Yet Siebert lacked online access to other products, like CDs, Coverdell accounts and various types of bonds. We found even fewer offerings at the recently rebranded SogoTrade, formerly known as SogoInvest. It was the only firm that didn't offer mutual funds, and just one of the 11 products we wanted was available: equity ETFs. "We're still a relatively small company," says William Yeh, SogoTrade's CEO. "As we become bigger, we'll offer more products."

Best: E*Trade
Worst: ShareBuilder

Look, up in the sky! Is that a brokerage? A bank? Actually, it's both. In what could be one of the industry's bigger gambles, you can now find firms like E*Trade and Fidelity offering everything from credit cards to free online bill-paying services, and even waiving fees for ATM withdrawals at other banks. Need a place for your gold? E*Trade, Fidelity and WellsTrade can store precious metals. Even traditional discount firms, like Firstrade, Muriel Siebert and WallStreet*E, are getting into the banking game with debit cards and cash transfers. (ShareBuilder, with bare-bones offerings, is an exception.) The reason is simple, says Scottrade's Dodson, who is getting ready to launch a slew of banking services. "There's a financial incentive for us."

If you haven't noticed a lot of these perks yourself, don't be surprised. Some are available only to the wealthiest clients, and even they have to do some work to get the best breaks. Schwab offers its highest interest rate on cash balances — 2.26 percent — only if someone connects a checking and brokerage account. Otherwise, rates range from just 0.25 percent to 1.50 percent, even for those with a balance of more than $5 million. And to get free trades at Banc of America or WellsTrade, you need to keep hefty minimums — $25,000 in a bank account linked to Banc of America; $25,000 combined in bank and brokerage accounts at WellsTrade and its parent, Wells Fargo.

Best: TradeKing
Worst: Zecco

Not everyone wants to e-mail, phone or chat with his discount broker. But when you need help, will it be there? That depends. Given the fierce battle over market share recently, we were surprised that three firms never bothered to answer the questions we sent in one e-mail — even after we told them that we had a $50,000 account and were "thinking of switching to your firm." Then there was Banc of America, which doesn't list an e-mail address for queries from prospective customers and instead has a live-chat feature that's difficult to find. (Hint: You have to start applying online to open an account in order to spot it.)

We had better luck reaching reps by phone. ShareBuilder, which was recently acquired by the bank ING Direct, proved to be the slowest at picking up our calls, taking over eight minutes to answer one of them. The folks at OptionsXpress were much faster, though the firm stood out for another reason: In one of our calls, we were distracted by loud chatter in the background and even heard someone shout "Whoo!" as our rep tried to stifle giggles. CEO David Fisher says phone reps at OptionsXpress keep up-to-date with live market news and sit right outside his office, "where all the energy and excitement is. Does that create a little more background noise? Yep, it probably does."

Noise wasn't a problem at WallStreet*E, the fastest firm of the bunch. But we did get put on hold twice while reps tried to find answers to our questions, and one e-mail response was blank except for the contact information for customer service. What about the firm's live chat, which never connected us to a rep? There was a "hiccup" in the system that particular afternoon, says Don Lee, the firm's chief operating officer. But Zecco Trading, in last place, doesn't even offer Web chat. It was slow to respond by e-mail and second-slowest to pick up the phone. The company says it's investing "serious money" to improve customer service.

One firm managed to earn five stars for best overall service: TradeKing. The company recently opened a new client-service center, and the effort seems to be paying off: Live chat worked without a hitch, our e-mails got answered in a speedy average of five minutes, and a phone rep even called us back to clarify his response to one of our questions. Now, that's service.