How to Choose an Online Broker
Who's Who and What the Experts Think of Them
By Kara Stefan
like our political candidates, the differences between full-service
and online discount brokers are starting to blur.
For example, Merrill Lynch now offers a pared-down online
trading account in addition to its bells and whistles version,
and strictly cyber-based operations like Mydiscountbroker.com
are planning to offer live brokers to advise traders on their
But with the growing proliferation of online brokerages in
cyberspace, how can you possibly find the most reliable, most
informative, and most cost-efficient option? In short, how
do you find the ideal broker for your needs?
Tap the Experts
Like almost every area on the Internet, there are dozens of
organizations whose purpose is to help you make this decision.
Just as the media sees its role as keeping elected officials
honest and forthcoming, research efforts by such firms as
Kiplinger and Gomez Advisors serve as industry watchdogs for
In its Fall 2000 survey of online brokers, Gomez ranked Charles
Schwab #1 in terms of overall score, with Etrade.com and Fidelity
coming in second and third respectively. However, Gomez uses
lots of criteria rating systems, so firm rankings vary according
to specific categories, such as:
- The "hyperactive trader": the investor who trades
frequently, and therefore prefers low commissions and super
fast-performing sites: (1) Etrade.com (2) FinancialCafe.com
- The "life goal planner": the investor looking for
mutual funds and a wealth of financial information and tools:
(1) Charles Schwab (2) Fidelity (3) Etrade.com.
- The "serious investor": the independent investor
who demands up-to-the minute research: (1) Charles Schwab
(2) Etrade.com (3) Fidelity.
- The "one-stop shopper": the investor who wants
convenience, a full selection of investment, credit card,
bill payment, and checking account offerings: (1) Fidelity
(2) Charles Schwab (3) Merrill Lynch Direct.
You may notice however, that many of these highly recognizable
names are not known for low-cost commissions--a primary characteristic
of online brokers. Of the low-cost brokers that ranked high
in the overall cost category, several were noted for improving
in areas of informative content and financial planning tools.
The top 3 were:
- FirstTrade.com ($6.95/trade)
- America First Trader (AFTrader.com; $9.95/trade)
- Trading Direct ($9.95/trade)
According to Kiplinger, 3.8 million new online accounts were
opened in just the first 6 months of this year, and online
trading has increased by 87% compared to a year ago. In its
October 2000 study, Kiplinger ranked its top picks for online
brokerages as follows:
- Muriel Siebert & Co.
- Fidelity Investments
- Brown & Co.
Kiplinger reports that for extensive research, Merrill Lynch
or Fidelity are your best bets. If you seek counsel from a
professional advisor, go to American Express or Merrill Lynch
Direct. If low cost is all you're seeking, look to Brown &
Co. or Datek Online.
Sizing Up Brokers
When push comes to shove, choosing an online broker is as
personal a decision as choosing a doctor or daycare provider.
Sometimes you find a broker who charges a bit more or may
not have all the fancy offerings that others promise, but
your instincts tell you this is the one.
Instinct and comfort level play just as big a role as ratings.
Start with the experts' recommendations, but then surf around
a few sites and rely on your own comfort level to make a final
choice. While you're shopping, watch out for the following
criteria to help make your decision.
- Commissions: as you well know, cheap doesn't generally
go hand-in-hand with quality. Be honest about your experience
as an investor. As a general guideline, the more advice
and information you need, the more you may want to pay out
to help ensure that you avoid poor investment decisions.
- Other fees & rates: read the fine print. Watch
for account minimum balances, trade minimums, annual administrative
costs, and compare margin rates and interest rates on fixed
- Customer service: it's frustrating not to be able
to speak to a live person, especially where money matters
are concerned, so one of the first things to look for is
a phone number that will connect you to live people, not
taped recordings. Also make sure the Web site is easy to
navigate and that you're provided with satisfactory explanations
for transactions and answers to any questions you may have.
- Banking services: it may not be that important
to you now, but make sure to select a brokerage that gives
you room to grow. Sometime in the future you may want an
account that offers money market sweeps, check writing and
bill payment services, Visa cards, direct deposit, and ATM
- Information: it may come in the form of educational
articles, market research, analyst reports, detailed financial
data and, at the very least, real-time quotes. This information
is all over the Internet, but you should determine for yourself
how necessary you think it is to have it on the same site
where you make your trades.
- Investment selection: if you're looking for a one-stop
shop, be aware that many online brokerages don't offer mutual
funds. Worse yet, some charge commissions on no-load funds.
Make sure the broker trades the full range of securities--some
do not trade all the stocks, bonds, or options currently
available on the market.