The best online brokers

By Kiplinger's Personal Finance

Bear markets aren't all bad. Consider one byproduct of the 2000-02 meltdown. As their portfolios shriveled, many investors hunkered down and stopped trading. That sparked an old-fashioned price war among online brokers, and commissions tumbled. Sparse trading also spurred industry consolidation. Gone are such discounters as BrownCo, Datek, Harrisdirect and Waterhouse. The survivors are providing customers with more services than when we last surveyed the group, in October 2004.

For this in-depth look at online brokers, we examined 11 firms, including the remaining major players as well as several small shops you may not have heard of. We looked at their prices and offerings for two kinds of people: those with more than $50,000 to invest and those with more than $500,000 to invest. The winner, in both categories, is a relatively new firm, OptionsXpress. Muriel Siebert & Co. comes in second, also in both categories. Wells Fargo finishes third.

Only when you get to fourth place does account size make a difference. Low-cost Firstrade finishes fourth for $50,000 accounts, while Charles Schwab & Co. takes fourth for $500,000 accounts. Schwab, which invented the discount-brokerage industry, is an odd duck. Every year it seems to look more and more like a full-service broker, albeit a low-cost one.

OptionsXpress has a lot going for it. You'll like its fast service, wide fund selection and low fund prices. "Online investing is a whole different language, and OptionsXpress helps you get started," says Hunter Bradford, 28, regional sales director in Chicago for a medical-software company based in Wyoming. "It's very simple and easy to use." On the other hand, OptionsXpress doesn't boast the cheapest stock commissions, and it doesn't offer any no-transaction-fee funds.

The fact is, what's best for you often depends on the kind of investor you are. If you crave research, the best choice by far is Fidelity, although it ranks fifth overall for both $50,000 and $500,000 investors. Investors looking solely for the lowest prices to trade stocks and funds should consider Wells Fargo. If you open a Portfolio Management Account (the firm's high-end checking account) with as little as $100, and you keep at least $250,000 in your brokerage account, you get your first 50 stock or fund trades free each year. Bear in mind, though, that commissions outside the PMA program are $19.95.

Kiplinger's rankings

For a $50,000 Account		For a $500,000 Account
1) OptionsXpress		1) OptionsXpress
2) Muriel Siebert		2) Muriel Siebert
3) Wells Fargo		3) Wells Fargo
4) Firstrade		4) Schwab
5) Fidelity		5) Fidelity
6) Vanguard		6) Firstrade
7) TradeKing		7) Vanguard
8) Schwab		8) TradeKing
9) E*Trade		9) E*Trade
10) Scottrade		9) TD Ameritrade
11) TD Ameritrade		11) Scottrade

To see a category-by-category breakdown of the rankings, please click here.

What they charge

Buying and selling stocks on the cheap was discounters' prime reason for being from the start. For trades of 1,000 shares or fewer, newcomer TradeKing ($4.95) and Firstrade ($6.95), along with Scottrade ($7), rank best in this category. But overall, commissions cluster tightly. Other than surprisingly expensive Vanguard ($25 in a $50,000 account), OptionsXpress and Siebert tie for the highest stock commission, at just $14.95 per trade. It's also heartening to see that higher commissions for limit orders have vanished completely. Note that Schwab's stock commissions drop to a competitive $9.95 (and Fidelity's to $8) if you and others in your household invest $1 million combined.Commissions, however, aren't the whole story. Many brokers hit you with pesky fees. So we added up the charges for such things as inactive accounts, annual IRA fees, and even fees to close an account. Schwab wins the "award" for high incidental fees. For instance, it charges $95 to close your account, $2.50 to send you an old statement and $50 to obtain a stock certificate directly from Schwab. E*Trade Securities is second worst in this department. Vanguard, OptionsXpress and Siebert are best at minimizing nickel-and-dime charges. For $500,000-plus customers, TD Ameritrade and Fidelity Brokerage also hold down fees.

When you buy or sell a stock, several hands touch your order, each pocketing a small amount. Here again the news is good: Thanks to heightened regulatory scrutiny, the brokers themselves are now earning an insignificant amount for executing stock trades. None nets more than a penny or two on any trade -- and even that level of compensation is extremely rare.

We looked at how well each broker spreads its trades among a variety of market participants -- an indicator of how well the broker's computers are shopping your trade around for the best possible price. Vanguard places highest in this category, followed by TD Ameritrade and TradeKing. At the bottom, from best to worst, are Scottrade, Schwab and Firstrade.

We penalized firms that route a large percentage of orders to firms they own. Here Fidelity, E*Trade and Schwab are the three worst offenders. Although Schwab sold its market maker two years ago, it agreed as part of the sales contract to continue sending orders to its former subsidiary for eight years. Brokerages that route orders to firms they hold only partial ownership in were also penalized, but less severely.

Is anybody home?

Bad service is unacceptable. You should not have to experience long waits when you need to talk with your broker. We set up accounts at all the brokerages, then tested how quickly we could get a broker on the phone, dialing each firm three times during a relatively quiet trading day in April. Siebert brokers answered our phone calls in an average of 21 seconds. OptionsXpress took 24 seconds; Firstrade, 30 seconds; and TradeKing, 42 seconds. The slugs: E*Trade took 10 minutes; Schwab, 4 minutes and 26 seconds; and TD Ameritrade, 3 minutes and 32 seconds.

To prompt a rapid reply, we next sent a panicky e-mail to each broker, falsely accusing it of misplacing a $25,000 check. TradeKing took 17 minutes to answer our question. (Automatically generated computer responses didn't count here.) Siebert answered in 44 minutes. Next best was TD Ameritrade, which replied in 13 hours and 24 minutes. The out-to-lunch (and dinner and breakfast) bunch: Scottrade didn't reply for 28 hours and 47 minutes, E*Trade for 22 hours and 8 minutes, and Schwab for 21 hours and 43 minutes.

Instant messaging works much better. Brokers that have it -- OptionsXpress, Fidelity and TradeKing -- all responded in 90 seconds or less. We gave all three extra credit for offering this handy option.

Finally, we quizzed the brokers to determine how well they could answer customer questions. We asked each broker the same three questions over the phone. Schwab brokers performed best in this exercise. TD Ameritrade and OptionsXpress tied for second; Fidelity finished last.

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