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One-Stop Mutual Fund Shopping: A Guide to the Discount Brokers
by John Markese
Discount brokers deliver what mutual fund investors want: no-fee, no-transaction-cost mutual fund supermarkets. This year the survey tallied 30 discount brokers that levy no brokerage fees for buying and selling a select list of mutual funds.
Investors have been quick to recognize the convenience of one-stop mutual fund investing. They can buy or sell mutual funds from different fund families (including no-load funds), all through one broker. That means that if you are buying mutual funds, there is no need to contact different fund families to transfer accounts when changing fund holdings. While switching funds within a family is relatively easy and seamless, switching among fund families has significant costs in time and paperwork. With the mutual fund supermarkets, a few clicks or one phone call will do it. Purchasing new funds is easy, and although switching may entail some holding period limitations to avoid switch fees, the restrictions are usually reasonable, and the fees incurred are relatively small.
There are some negatives, however.
The most important one is that the discounter may not trade all the funds or fund families that interest you. Also, you will still have to pay loads if the fund itself has a load, as well as switching fees if you switch too often, but that would be true whether you went with a discounter or to the funds directly.
Table 1 lists the discount brokers that offer no-transaction-fee funds. The number and mix of funds offered by each firm is growing rapidly. This year TD Waterhouse Securities is at the top of the list with 9,300 no-transaction-fee funds offered. Yes, there are that many, and more, mutual funds.
Another measure of the depth of a brokers service is the number of different fund families participating in the brokers no-transaction-fee program. Again, TD Waterhouse leads in no-transaction-fee fund families with 438 choices; second is Bidwell & Co. with 320 no-transaction-fee fund families. Many of these brokers list over 400 total fund families both with and without transaction fees; one lists a total of 1,280.
If you do incur a transaction fee, just how expensive is it? Table 1 lists the minimum transaction fees for each broker, as well as sample fees for $100,000 and $10,000 mutual fund purchases. Minimums range from a low of $15.00 to a high of $75.00. But these discounters also have maximum transaction fees and different break points in steps from the minimum to the maximum charge. Some have a sliding scale as a percentage of the trade value; some give their brokers discretion to lower the fee for individual customers. These discount brokerage firms have brochures and Web pages explaining their mutual fund programs, including transaction fees. All seem to have some unique pricing structures, requirements, minimums, etc. It pays to read the descriptions.
The minimum purchase amount is usually the higher of the broker-imposed minimum or the funds minimum. Retirement account minimums are generally less. Payment for no-load funds is usually required the next business day, and for load funds it is within three business days, the same as a stock purchase. But if the brokerage is offering its own funds—Fidelity, for example—there may be differences. Again, it is crucial to read and understand each supermarkets rules.
Switching within the no-transaction-fee network has even more rules unique to each broker, so keep that description handy. Table 1 lists any minimum switch fees along with how long shares must be held to qualify for a free switch. Ninety-day and six-month minimum holding periods are common, but not standard.
On-Line Access and Trading
Table 1 also details the on-line mutual fund services offered by these discount brokers. Discount brokers are encouraging electronic access and trading directly through on-line services and the Internet. Internet trading is available for all but two of these discounters and a few offer discounts for trading on-line.
On-line account data, including portfolio value, transactions, and quotes, is an extremely useful function offered by most discounters. Most also offer mutual fund screening, but the power, depth of data, and flexibility of these on-line tools are usually limited. Free reports, when offered, are often summary material but can be useful for quick first looks and comparisons.
The Bottom Line: Convenience
If you find all the funds you are interested in under one brokerage roof and they are no-transaction-fee funds, the service is hard to beat. There is a reason these fund supermarkets are popular—simplified paperwork, quick transactions and switches, and a single account statement are all valuable benefits.
Add to this the on-line features most supermarkets offer and it is easy to explain the interest. For some, convenience and service may be more important than cost; others will find more value in a pure no-transaction-fee service.
The services, funds, costs, and rules of these supermarket programs are all different. Be sure to take the time to study the Web sites or do a brochure-to-brochure comparison before you reach a decision.
|For More Information|
To find out more about these and other discount brokers, visit AAII.com. In the Special Reports section on the right-hand side of the home page. Here, youll find a link to our annual Discount Broker Survey.
John Markese is president of AAII. The article was researched by Jean Henrich.