Online Discount Brokers
by Joe Lan, CFA
Being a member of AAII most likely means that you do your own investing in some form. Due to their relative low costs and ease of use, online discount brokerages are one of the most popular methods of buying and selling investment holdings. Since most discount brokerages have similar pricing models, each makes an effort to distinguish its service from competitors by offering more powerful research and analytical tools for the do-it-yourselfer.
We set our focus on the top five most widely used online discount brokerage services, as rated by our members. Although we only review the top five, the survey results from our members indicate that these five brokerages combine to account for about 72% of total use.
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This comparison briefly discusses what you can expect from online brokers in general and then examines the specific differences in the five services we are highlighting this year.
AAII Broker Survey
To determine which brokerage services to include in our comparison, we consulted AAII’s Online Discount Brokerage Survey. Members fill out a questionnaire rating the broker they use on several factors, including reliability, trade price, and execution speed. For this comparison, we chose the five most popular brokers from the 2010 survey. Table 1 lists the five brokers along with their AAII member ratings.
To participate in our survey, go to AAII.com and select Investor Surveys from the Home tab. This is an ongoing and open survey, and we welcome feedback to help in our data collection.
Comparing the Brokers
The comparison grid on pages 24 and 25 summarizes the similarities and differences of the five brokers based on the services, tools and data that they provide on their websites.
The trading platforms for the five brokerages are all relatively similar. Usually, there are two types: one trading platform for regular investors and a separate one for active investors. The Web-based platform can be used by all investors and typically handles stocks, options, bonds, mutual funds and exchange-traded funds. Simply enter the action, quantity and ticker, and the order will be executed. In addition to placing market orders, all the Web-based platforms allow you to place limit orders (setting the minimum sell price or maximum buy price for a security), and they all allow you to specify order fulfillment options such as good-until-cancelled or one-day-only.
Active trading platforms are usually launched from the website and may be restricted to investors with large accounts or those who place trades frequently. Most active platforms show real-time price quotes and volume data. In addition, most will offer more advanced investing tools, such as the ability to backtest or chart technical indicators. The active trading platforms also offer direct market access, allowing investors to interact directly with the order books of an exchange. Normally, investors have to go through broker-dealers, but direct access theoretically cuts out the middle man, allowing orders to be executed quicker and with more investor control over the trade price.
Research Data and Tools
These online brokers now all offer fundamental data on stocks, mutual funds and ETFs. Most of this information comes directly from a trusted source such as Reuters or Morningstar and is very comprehensive.
Price and volume data is offered in real time in some cases. At a minimum, the websites can be manually refreshed to see updated figures. Company news is also provided, as well as simple charts for the needs of each stock. All brokerages now offer some technical indicator overlays, and the number of indicators available should be sufficient for the needs of most investors. Commonly used profitability, valuation, financial strength and management effectiveness ratios are all provided by each brokerage service. In addition, most brokerages will offer some sort of insider trading activity data.
Consensus earnings estimates have become very common. Financial statements are provided but usually summarized on several pages. Both annual and quarterly financial statements are presented by all the brokerage firms. Most brokerages will also link you directly to company filings such as 10-K and 8-K.
|Rating (Top Score = 4)|
The mutual fund data provided by the brokers typically comes from Morningstar or Lipper and includes most of the data provided by these sources, such as ratings, common risk factors, and management fees.
The presentation of ETF data is comparable to that of mutual fund data, but with fewer data points. Performance numbers typically cover shorter periods, since ETFs in general are newer investment products.
Screeners for stocks, mutual funds and ETFs have also become a ubiquitous feature at broker sites. Although each broker’s screener will differ, they all provide a large universe of stocks and a satisfactory number of data points. The comparison grid on pages 24 and 25 provides further details on the screeners available through each brokerage service.
Investors commonly want to see their portfolio holdings all together, but most brokerages only allow for portfolio tracking of assets that are held at their brokerage firm. Certain brokers will allow you to enter outside holdings into a financial planning scenario but not into a comprehensive portfolio tracker.
The Top Five Brokers
Scottrade is the discount brokerage used most by our survey members. Its website has a very simple design. There are five main sections to the site: Home, Trade, My Account, Quotes & Research and Knowledge Center. The Home page lists only your holdings and account value, open orders, completed orders, positions and watchlist. A quick quote lookup bar is available on the left-hand side of the page along with the value of major indexes.
In order to execute a trade, the Trade section is where you enter the action, shares, symbol, order type and duration. Scottrade can handle stocks, options, mutual funds, bonds and CDs, but it does not handle futures. Scottrade also allows you to place advanced orders such as conditional orders that execute if an event occurs. Pre-market trading from 7:00 a.m. until 9:28 a.m. EST and after-hours trading until 8:00 p.m. EST are also available.
All relevant account information, including balances and positions, is provided in the My Account section. Watchlists can also be created in this area. A gain/loss and tax center shows the unrealized and realized gains and losses for your positions and presents the incomplete positions for which cost bases are needed. The default tax strategy on the account is first in, first out, unless otherwise set by the user. Tax statements, IRS tax forms, a tax guide area and the cost basis FAQ are also linked in this section. The account history page provides transactions, confirmations, account statements and tax statements, all of which can be sorted according to time frame. You are also able to check your order status, review deposits and withdrawals, and verify your alerts in the My Account section.
Scottrade’s Quotes & Research section offers some unique features. The market overview page lists how the most widely followed market indexes have done over the past quarter and year. Additionally, the strongest performing investments and best- and worst-performing industries are also presented in the overview page. The market pulse area provides a heatmap and performance chart of the major equity, fixed-income, and commodities indexes and ETFs. A page on analyst views offers the recent S&P Star Ranking and Briefing.com rating changes, and a quick search of a company will bring up the recent changes. Although this information is highly useful, it seems that only the most recent weeks’ rating changes are presented. The market calendar area lists major company events such as initial public offerings (and earnings and dividend announcements, and the world markets area provides fundamental data and top-performing investments for the international markets. Aside from these areas, Scottrade also provides a detailed quote for each company if you type the ticker symbol in the quote search box. However, nothing truly stands out in the detailed quote, as the data is fairly universal.
The Knowledge Center provides users with educational articles, guides, and how-tos. The information presented is relatively basic and is meant to familiarize new investors with account types, investment products and retirement planning concepts. There is also a media center that provides video explanations of investment topics and an online community where investors can discuss their opinions with other Scottrade users.
At the Charles Schwab website, the main areas are accessed through tabs that run across the top of the page. The Accounts area provides all relevant information for the current holdings in your account, including balances, positions, performance and history. Additionally, the portfolio analysis page shows a breakdown of your current portfolio and provides some tips. Your current asset allocation is compared to your target risk profile, and suggestions are made as to what you can do to bring your current asset allocation more in line with your target. Your target allocation can be changed by answering a quick questionnaire on your investing traits. Furthermore, you can see a break-down of your portfolio’s diversification and equity concentration. The quality section provides ratings for each of the holdings in the portfolio. Yellow exclamation points are displayed in potential problems areas. Otherwise, a green “ok” is displayed. Portfolio reports can be printed from the same area.
Transfers & payments is a separate section in the Accounts area. This section allows users to transfer and wire funds, request checks, pay bills and add external accounts. You can view your messages and check corporate actions such as tender offers and merger elections in the message center.
Using Charles Schwab’s Web-based platform to trade stocks is very simple: Enter the symbol, action, quantity, order type and timing, and the brokerage firm will execute your order. A noticeably missing feature is price and volume information. Most investors have a good idea as to the price of the stock they are buying, but volume is equally important for investors in small- and micro-cap stocks. The price is given on the review order page, but volume is still missing. As far as we can tell, you have to go to the quotes section to retrieve volume data.
Charles Schwab can handle stocks, options, mutual funds, ETFs, bonds and CDs. It also offers an IPO section that lists conditional offers to purchase and a calendar of initial public offerings. Those who want to trade futures are referred to a site with which Charles Schwab is affiliated.
The site offers a comprehensive research section. A general market overview and news items are listed on the main research page. Stock data includes news, charts for a broad time range, and ratings. Financial ratios are available in the fundamentals section, along with a range for the sector and a graphical comparison, which is a very useful feature. Quarterly and annual statements are provided for the last five periods, along with the trend of each line item. The peers section allows you to graph the performance of a stock versus an index or another stock over the past year. Research reports from Charles Schwab and Credit Suisse are also available.
The ETF and mutual fund data offered is very basic. Performance figures, a general overview of the holdings, the prospectus and a mutual fund/ETF report card are included for mutual funds and ETFs. The site also provides information on minimum investments for mutual funds. A separate section for bonds and CDs presents general information such as the U.S. Treasury yield curve and key rates.
Although all of the brokerages in this comparison provide a similar amount of raw data on stocks and mutual funds, Charles Schwab provides an abundance of analysis and commentary. Furthermore, screeners are available for stocks, mutual funds, ETFs and even fixed-income funds. Charles Schwab covers a universe of 7,200 domestic and ADR stocks and offers eight predefined stock screens. The mutual fund screener comes with 10 predefined screens and covers a universe of over 20,000 funds, and the ETF screener has 16 predefined screens and a universe of over 900 ETFs. The fixed-income mutual fund screener allows users to screen on taxable and tax-free funds.
Several trading tools are also available at the site. StreetSmart.com launches right from your Web browser and allows you to see real-time quotes for stocks in your watchlist and set up alerts or conditional orders. StreetSmart Pro is available free for active investors (48 or more commissionable trades in the past year). The active platform allows for fundamental and technical stock screening in real time, and the Strategy Tester allows you to test technical trading strategies.
In addition, guidance on retirement, saving for college, estate planning, life events and taxes is offered at the site.
Fidelity is the third most frequently used discount brokerage among our survey respondents.
After you log in, the summary main page lists the total value of your portfolio along with data on the major indexes. Portfolio positions, research, analysis and statements are all conveniently accessed through separate tabs. The portfolio research page is very useful, as it lists the latest news and research for your current holdings. The analysis section shows your asset allocation, equity style profile, and industry and sector weightings. Fidelity also offers BillPay, which, as the name suggests, enables you to pay bills directly from your Fidelity brokerage account.
Fidelity’s News & Insights section provides the most comprehensive news area of the brokerages that are reviewed in this article. News is divided into U.S. markets, U.S. economy & jobs, technology, international, company news, IPOs, mergers & acquisitions, and investment ideas. A separate section of news videos is also offered. Furthermore, the news sources are top financial websites such as MarketWatch, CNN Money and Reuters. The insights section provides analysis on recent market trends and areas where you might find growth. An area called Fidelity viewpoints provides all the various Fidelity publications and articles.
The Research section offered at Fidelity allows users to run a quick search for investments such as stocks, mutual funds and ETFs. Once again, the data is similar to that provided by the other top discount brokers. Fidelity does allow you to make a hypothetical trade to see how your asset allocation would look if the trade were executed. Additionally, options information is linked on the main quote page.
The Research section also houses a comprehensive page called markets and sectors. Market news and analysis for equities, interest rates, foreign exchanges, energy, metals and agriculture includes links to research reports. Analysis and price change information are displayed for various sectors and industries as well. Fidelity recommends percentage weightings for each sector based on sector analysis by Standard & Poor’s and Ned Davis Research.
Fidelity’s backtesting feature is very useful. You can backtest a strategy using a single symbol or multiple symbols. For instance, if you want to trade a particular stock based on its 50-day EMA crossover, Fidelity shows you how you would have performed using the strategy. It includes the effect of dividends, cash interest and commissions paid to simulate a real-world situation.
The Guidance & Retirement section is also strong. Investment guidance and retirement planning are the main focus, but life stage and life event planning are also offered. This section is particularly useful because of its step-by-step recommendations on how to best plan for crucial times, such as starting out, building wealth, getting ready for retirement and managing wealth in retirement. Additionally, in-depth articles on changing jobs, getting married, having a child, and caring for an elderly parent are intuitive and constructive. While not all investors will need the advice, it is beneficial to have the articles at your disposal.
The Fidelity Income Strategy Evaluator is a useful retirement planning tool. The program asks you to input a general idea of your income and expenses in retirement, information about accounts held elsewhere that will be included as retirement assets, and your current pretax income. The tool then provides an estimation of your monthly income based on your holdings. A suggested target income mix is provided that takes into consideration your needs and preferences. Furthermore, an idea of how your portfolio will perform in both bull and bear markets will be displayed. This tool gives users a rough idea of how best to allocate their holdings in order to generate sufficient retirement income.
TD Ameritrade has gone through some changes in the past few years, acquiring companies such as Thinkorswim, an online active trading platform. Thinkorswim is now fully integrated into TD Ameritrade and serves as its active trading tool.
Once you have logged in, TD Ameritrade will display a summary of your account. The information located here is conventional, including cash and margin balance, account value and messages. The main page also displays your watchlist, status of your orders and major index values.
From the Home page, clicking on the Accounts tab takes you to in-depth information on your account. Along with the usual account balance and order status review pages, a portfolio planner analysis feature allows you to compare your current asset allocation to your target portfolio allocation. You can modify your targets by clicking on “security allocation.” Furthermore, several predefined asset allocations are provided—including capital preservation, stable, balanced, growth and aggressive—and you can choose one that is appropriate without having to define the targets yourself. A cash management section offers debit card and checking writing features.
Placing orders using the Web-based platform is straightforward. Entering the symbol of the stock will bring up the price, volume, bid and ask. The data does not update in real-time, but there is an icon to refresh the numbers. TD Ameritrade also offers conditional orders that allow you to combine multiple orders. For example, you can set a condition where execution of the first order will prompt cancellation of the second order, or where execution of the first order prompts execution of the second order.
TD Ameritrade is able to handle stock, ETF, options, bond, mutual fund, and even futures and forex (foreign exchange) trades. However, you must apply and meet certain account requirements in order to place futures and forex orders. “Trade triggers” can be set up that trigger an order execution if an asset meets a certain price, volume, or percent change criterion.
Research data provided by TD Ameritrade is among the most comprehensive of the brokerages in this comparison. The Research & Ideas section of the site includes separate areas for each of the major asset classes, as well as IPOs, alerts and ideas. The markets page offers a calendar detailing major company events and market reports by Standard & Poor’s, Thomson, Argus and others. Stock and ETF data is provided by Reuters and the mutual fund data is provided by Morningstar. The IPO center provides information on upcoming initial public offerings, but in order to receive this data, you must call in and apply to purchase these shares. The ideas page lists important news and analysis from well-recognized research firms and investment banks such as Argus, Credit Suisse and Zacks. Several tools are also available on this page. The Minyanville Buzz & Banter is an online forum that allows you to gain insight from third-party industry leaders. The PredictWallStreet tool presents continually updated data on the possible movement of security index values. Investors can answer general questions such as what their prediction is regarding the market movement for the day and the aggregate results will be displayed. (Just keep in mind when viewing this data that open surveys such as these are usually answered by non-professionals and may oftentimes act as contrarian indicators.) Workshops are also offered and seem to be popular, as several were full as this article was being written.
TD Ameritrade provides mobile apps for an impressive line-up of operating systems, including the iPhone, BlackBerry, Windows Phone, and Android. They also offer a separate mode for mobile browsers, which allows users to log on to the website from any number of phones with Internet access.
A couple of useful tools that TD Ameritrade offers are the Pattern Matcher and StrategyDesk. The Pattern Matcher is a recognition tool that is designed to help you find securities that match well-known technical charting patterns, or securities that are highly correlated to the pattern of a particular symbol. The StrategyDesk is a trading and analysis platform that combines backtesting, charting and real-time screening. It allows you to develop and test investment strategies and, when you are ready, set alerts and execute the strategies.
Educational tools such as workshops and webcasts are available. TD Ameritrade also offers online courses to help investors learn about various topics such as put and call options.
The data on the main summary page of E*Trade closely resembles what you would find at the other brokerage sites: your accounts along with the net account values are provided. This page also links to an “online advisor” that offers a recommended asset allocation and investing solutions based on the investor profile that you provide. The online advisor helps you choose between stocks, ETFs and mutual funds, or may even recommend that you work with an investment professional.
E*Trade also offers Bill Pay, which automatically pays recurring bills using the cash balance in your portfolio.
Entering orders is very straightforward and E*Trade provides you with the relevant data you need right on the order page: The volume, price, bid and ask are all displayed as soon as a ticker symbol is typed in. E*Trade is able to handle stocks, options, bonds and mutual funds; in order to trade futures, you must open a separate futures accounts with E*Trade. There is no mention of foreign exchange trading. However, E*Trade does allow users to trade in foreign markets—namely Canada, France, Germany, Hong Kong, Japan and the United Kingdom—providing further diversification avenues and a possible hedge against the U.S dollar. A section with current and upcoming offerings for IPOs is included.
The active trading platform, E*Trade Pro, is available to all investors for free, even those who do not actively trade. This platform provides direct-access trading for stocks and options and real-time streaming market data. Furthermore, a technical screener and a sector and industry tracker are both offered. The Strategy Scanner lets users develop and backtest technical trading strategies.
Separate research sections are presented for the U.S. and global markets. You can see intraday trends for major indexes, a feature unique to E*Trade. The world news is satisfactory but not as robust as the U.S. market news. Charts can be displayed for each investment symbol. Numerous technical indicators—such as momentum bars, exponential moving average, Bollinger bands and relative strength index—as well as company events—such as splits, dividends and earnings reports—can be overlaid on each chart. The day’s range and volume data are displayed for each investment holding.
For individual securities, the research area also includes financial statement data and ratios, as well as research reports from Reuters, Standard & Poor’s and Credit Suisse. Industry data, for comparison purposes, historical data, and insider trading information are also offered. Mutual fund data, provided by Morningstar, is comprehensive, but it does not differ from that found at the other major online brokerages. Data offered on ETFs includes 10 years of performance numbers (when available) and Morningstar risk and performance ratings. An ETF screener has been added since our last review and allows screening across a universe of over 1,200 ETFs.
E*Trade has recently implemented a community area that is still currently in beta. The discussion board allows users to share their investing theories and post their ideas. Even though this feature is in beta, a good number of users are taking advantage of it: Popular topics generally have over 40 discussion board posts, and most responses are constructive and thought-provoking.