You don't have to be a day-trader or big-time investor to manage your own portfolio. You can do it yourself using an online broker.
“It’s real easy,” says Dr. David Oehling, a cardiovascular surgeon in Grants Pass, Ore. “You click on a button and it happens.”
Dr. Oehling started using TD Ameritrade about 10 years ago. He says he simply got tired of paying big commissions to a full-service brokerage firm. Making the switch, he says, gives him “an amazing sense of freedom.” Because the transaction fees are so low, he can afford to buy and sell as often as he wants.
Clearly, full-commission brokers have their place and are right for some investors. But with so much information available online these days, millions prefer to go it alone.
Consumer Reports rates online brokers
There are about three dozen online brokers. Many of them now target small investors with low trading costs, no transaction-fee mutual funds and free research. They want to become your all-purpose financial home page.
Consumer Reports Money Lab surveyed 19 Web-based financial firms for its ratings. All of the sites are accessible via standard Web browsers; none requires downloading special software or a dedicated connection.
“We looked for brokers that weren’t for the fanatical day-trader type, but for the average person who makes maybe two or three trades a month at most,” says Greg Daugherty, the magazine’s executive editor.
Consumer Reports graded the online firms on a variety of factors, including research and education, banking and asset management, and customer support. Cost was an important consideration. The highest marks in each category went to brokers who provided a service at no cost.
“Free is a good price,” Daugherty says. “So we really like the ones that provide a lot of these things to investors free of charge.”
And the winners are …
Firstrade Securities (92 points)
Established in 1997, Firstrade is one of the pioneers of Web-based trading. The company earned points for low trading costs, variety of services and strong mutual fund program. Firstrade charges $6.95 per trade. It also has the most no-transaction-fee funds of the 19 firms surveyed — more than 5,400.
The firm also received higher-than-average grades for trading, customer support, banking and asset-management, and research and educational tools.
“All-in-all, they offer a very good and inexpensive package,” Daugherty says.
This is Firstrade’s second consecutive trip to the winner’s circle. It came out on top in 2005, the last time Consumer Reports rated online brokers.
E*Trade Financial (87 points)
E*Trade’s minimum trade charge of $12.99 is higher than others, but it made up for that with above-average ratings in other categories, such as customer support, banking and asset management, as well as research and education.
TradeKing (86 points)
A relative newcomer to the field, TradeKing has made a name for itself with its $4.95 flat-rate commission. The Consumer Reports survey found TradeKing to be the least expensive way to go for straight stock trading. It also has low flat-rate fees for bonds and the lowest cost structure for options.
TradeKing launched in December of 2005. Donato Montanaro, Jr., the company’s President and CEO, also founded SureTrade, one of the early electronic trading firms, back in 1997.
Charles Schwab (85 points)
This is the highest ranking Schwab has ever received from Consumer Reports. The main reason is the company’s decision last July to lower its basic trading fee from $19.95 to $12.95.
Schwab earned top honors for research and education. The editors say it provides “a solid array of analyst reports, free portfolio advice, and a nearly complete suite of online investing tools and calendars.” Schwab also took runner-up honors in the customer-service category.
The king of index funds comes in last
Vanguard Brokerage had the lowest overall score (26 points). It was hurt by its $25 basic trading fee, the highest of the 19 firms in the Consumer Reports Money Lab survey.
Vanguard had some of the best scores for customer support, research and education, but it does not offer as many mutual funds as some other sites.
“Vanguard is still a very good company,” Daugherty told me. “We are fond of them for a lot of things they do and offer. But they would not be our first choice if you’re looking for an online broker.”
Daugherty says Vanguard might be OK for those who don’t do much stock trading and already have a good chunk of money in mutual funds. And he points out; Vanguard’s low score does not mean it is the worst online broker.
That’s because a number of well-known online brokers — including American Century, Citibank and Ameriprise — did not respond to this year’s survey. “Until we hear from them,” the editors say, “feel free to assume that they might have scored lower than the brokers we rated.”
Some free advice
Maybe you are ready to start using a Web-based broker or are thinking about switching to a different one. Look for sites that provide the kinds of services you already use at a reasonable cost.
“Look at the full ranges of services, more than just price,” Daugherty advises, “because if you don’t trade that often, the trading price is not going to be that big of a deal anyhow.”