Choosing the Best Online Broker for You

A Message from Kimberly Clouse, Financial Expert:

kim_clouse I have worked in the financial services industry for nearly a decade in many capacities, most recently as a financial adviser for individuals. Over the course of my career, I have had the privilege of working with a diverse range of people, from the single mother just starting her own business to the billionaire. Based upon my experiences, I have learned that the same basic principles and lessons apply to a successful and healthy financial life, whether you’re starting out or cashing out. These guiding principles include simplicity, a long-term perspective, and above all, knowing that you have control of your financial destiny, and all the information you need is well within your reach.


Choosing the Best Online Broker for You

Over the past few years, the growth of online investing has been explosive, to say the least, and the trend is expected to continue. According to a January 2000 Robertson Stephens report, close to 31 million e-brokerage accounts will be open by 2003, from just under 4 million in 1997. Moreover, Jupiter Communications predicts that online brokerage assets will grow to more than $3 trillion by the end of 2003, a seven-fold increase from $415 billion at the end of 1998.

With the recent investor appetite for online trading, more and more brokerage firms are entering the fray, giving investors plenty of choices for selecting an online broker. How, then, to choose? Besides seeking out low commissions, choose a broker that matches your investing style. Frequent traders need different services than do buy-and-hold investors; experienced investors have different requirements than novices.

Consider the following when selecting the best broker for you:

  1. “I Said 100 Shares, Not 1000.”
    Commissions and fees will likely differ for 100-share trades versus 1000-share trades. Or, the brokerage may require that you keep a minimum balance in your account or make at least a certain number of trades. Be sure that your investment behavior will qualify you for the brokerage’s best rates. That attractive trading rate advertised so heavily on TV and in the paper may not apply to you and the way you trade. Check the commission schedule for your type and volume of trading.
  2. What About ADRs?
    Most of the current online investing world is oriented toward stock trades. But what if your portfolio also consists of ADRs (American Depository Receipts, which are receipts for stock in a foreign company), mutual funds, and options? Make sure that the broker you choose can trade the securities you want to trade, in the way that you want to trade–over the Internet–and for a reasonable price. Similarly, be sure that you pick a broker who accepts the types of orders that you like to use. For instance, if you use stop or stop limit orders to protect your profits, be sure you pick a broker who accepts these types of orders.
  3. Beware Hidden Costs
    On the surface, brokerage services might look cheap–as low as $8.00 per trade in some cases. But, as with all fee schedules, read the fine print. Some brokerages impose additional fees for services such as delivery of stock certificates, late payments, transfer fees, wire fees, IRA fees, annual maintenance fees, and termination fees.
  4. Rates, Rates, Rates
    Most brokers offer money market accounts for any cash that is not currently invested, and depending on your investment portfolio, the amount of this interest can be substantial. Be sure to ask your broker the following:
    • What interest rate will my cash earn?
    • Are any cash funds automatically swept daily into a money market?
    • Can I write checks–for free–out of this account?

    The other rate to examine is interest rate on margin loans. A margin account allows an investor to borrow against the equity in his account to buy stocks, thereby stretching his or her buying power. Margin accounts vary widely across brokerages, so be sure to comparison shop.

  5. Support and Stress
    In Internet Utopia, systems would never fail, and Web sites would have so much easy-to-find useful information that all customers’ questions and concerns would be answered. Until we get there, however, customer service is important. Before opening an account with X Brokerage firm, make sure the firm offers satisfactory customer service. Is there an 800 number to call for help 24/7? Does a live person answer that number? After how long? Does a broker respond to your e-mail inquiry?

    Also, what is the broker’s emergency back-up plan in case of emergency? If the broker’s system crashes, do they have back up systems that can handle trades? Will you be routed to another company? The best possible back up is second or even third accounts at different brokerages. And of course, begin the process of opening these accounts well before you need to access them, since accounts can take weeks to open.

    In the end, selecting a broker is a matter of personal taste. Do you like the look and feel of Site A better than Site B? Is it easier to navigate? Have better tools? Before you commit, use the free trading demo at the broker site to get a feel for trading online at that site. And importantly, remember that you, as the customer, are in the driver’s seat. Competition for new accounts has become so fierce that some brokerages are offering perks such as frequent flyer miles, free trades, gold credit cards, or even cash in your account.

This column is designed to provide accurate and authoritative information on the subject of personal finances. It is provided with the understanding that the Author is not engaged in rendering legal, accounting, or other professional services by publishing this column. As each individual situation is unique, questions relevant to personal finances and specific to the individual should be addressed to an appropriate professional to ensure that the situation has been evaluated carefully and appropriately. The Author specifically disclaims any liability, loss or risk which is incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this work.