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How to Choose an Online Broker

Who's Who and What the Experts Think of Them

By Kara Stefan

Much 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 are planning to offer live brokers to advise traders on their investment selections.

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 online brokerages.

In its Fall 2000 survey of online brokers, Gomez ranked Charles Schwab #1 in terms of overall score, with 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) (2) (3)

  • The "life goal planner": the investor looking for mutual funds and a wealth of financial information and tools: (1) Charles Schwab (2) Fidelity (3)

  • The "serious investor": the independent investor who demands up-to-the minute research: (1) Charles Schwab (2) (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:

  1. ($6.95/trade)
  2. America First Trader (; $9.95/trade)
  3. 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:

  2. Muriel Siebert & Co.
  3. Fidelity Investments
  4. Brown & Co.
  5. Etrade

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 accounts.

  • 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 cards.

  • 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.



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