Choosing an Online Brokerage: What's Right for Me?

When it comes to online brokers, there is plenty to choose from. It's not as easy as I thought it would, it's just about the commissions costs it turns out. Each brokerage has its own pricing structures, its own set of features, and its own customer support which can vary wildly from one broker to another. So, I dived into this craziness and this post shows the results of my research.

What I'm looking for:

• First and foremost I'm looking for the cheapest trade execution around
• Even though I don't plan on making many trades, I want commissions to have the most minimal effect on my returns possible
• Low fees on other things besides the trades (funds transfer, etc.)
• High interest rate on cash sitting in the account
  
• Relatively easy to use web site
• Reasonable amount of paperwork involved in opening and maintaining the account

Other minor things that would be a plus:

• If possible, a good selection of no-load mutual funds with free transactions, but I have no problem dealing directly with the funds so this not a deal breaker for me


• Research tools and other trading-related feature would be nice, but this is not a big deal for me either since I use Morningstar for stock and fund research

I've found a number of web sites that reviewed and ranked various online brokers, they are listed at the bottom of the post. So far, my favorites (yes, mostly because of their low prices) are TradeKing ($4.95/trade), Scottrade ($7/trade), and Firstrade ($6.95/trade). Besides the difference in commission rates, they also vary in other features:

• Firstrade (www.firstrade.com)
• 4.39% default interest rate on cash
• doesn't charge any fees to buy/sell any of its no-load mutual funds (1900+ total funds offered)
  
• has one of the least user-friendly web sites
  
• had the least number of run-ins with the law and customer disputes
• they currently have a "100 commission-free trades" promotion if you open your account before 10/31/07 and fund it with $2,000+ within 30 day of opening the account; you must also keep that balance for at least 9 months
  


• TradeKing (www.tradeking.com)
  
• 1% default interest rate on cash and about 3.3% if you elect to
  
• few stock/fund research tools
• lacks a good selection of no-load mutual funds and offers less than 1,900 mutual funds in total
• charges $14.95 to buy or sell any of the mutual funds it offers (including no-load funds)
  
• doesn't provide cost-basis information for your trading activity, which will cause a hassle at tax time if you don't keep track of all trade details yourself
  


• Scottrade (www.scottrade.com)
• 3.25% default interest rate on cash
• offers less than 1,900 mutual funds and less than 1,000 of these funds without a transaction fee
  

Other cheap online brokers:

• SogoInvest (www.sogoinvest.com)
• $3/trade or as low as $1 if you get a subscription plan
• have not heard much about it, but SmartMoney has ranked it very low in most categories in the recent broker survey
• it seems to be one of the newest brokers around and its quality and offering might improve in the future


• Zecco (www.zecco.com)
  
• free 10 trades a month and $4.50/trade after that
• $2,500 minimum required balance
  
• many users have reported hassle with paperwork related to everything starting from opening the account to transferring the funds
• skimpy customer service
• since this broker uses ad revenue to offset its costs, web site can be somewhat cluttered
  

My Strategy

I'm thinking it might make sense to open two accounts: one for stock trading and one for mutual funds. Before I'll make any final decisions, I will need to decide on the mutual funds I'm interested in and then see which discount brokers offer it as a no-fee fund (it's not the same as "no-load" fund, brokers can charge a transaction fee even for no-load funds). At this point, best combination of brokers would be: TradeKing account for stock trading and Firstrade for mutual funds. This way I would have the low stock trading commission rate of $4.95/trade and no fees related to mutual fund trading.

Additional resources:

• ConsumerSearch.com: Online Brokers (Feb '07; summarizes reviews from 12 different web sites)
• SmartMoney: Finding the Best Broker (Aug '07)
  
• Kiplinger.com: The Best Online Broker (July '06)
• USA Today: Online brokers step up competition with free trades (Jan '07)

• MoneyBlog: Zecco Review (May '07; blogger's personal account of his experience with Zecco plus what seems like a 100+ comments of users sharing their experiences with Zecco)
• MoneyBlog: TradeKing Review (Aug '07)