• Broker Guide 2009
  • Special Features
  • 2009 Discount Broker Guide

    by Jean Henrich

    Stock market investors suffering from the recent market declines (38.7% decline in the overall market for 2008, as measured by the Dow Jones Wilshire 5000 index) won’t be receiving any breaks from their brokers this year if they want to buy or sell shares, according to AAII’s 2009 Guide to Discount Brokers.

    This year’s guide showed brokerage commissions creeping up slightly over last year.

    The average commission for a broker-assisted $5,000 trade (100 shares at $50/share) totaled 0.65% of the trade, compared to 0.63% for last year’s survey; the average commission for a broker-assisted $25,000 trade (500 shares at $50/share) totaled 0.21% of the trade, up slightly from last year’s 0.19%.

    The lowest commission for broker-assisted trades is from newly listed OptionsHouse, at a flat rate of $2.95 for both the $5,000 trade (0.06%) and the $25,000 trade (0.01%). The highest commissions are charged by Cutter & Co. Brokerage and USAA Brokerage Services (1.20% for the $5,000 trade) and Max Ule (0.78% for the $25,000 trade).

    This year’s survey covers 51 firms that refer to themselves as discount, 43 of which offer on-line trading. Two firms, Fimat USA and InvestIN Securities, dropped out of our guide due to merging into companies that are not discount brokers.

    New to this year’s listing are: ChoiceTrade, OptionsHouse, trade MONSTER, Trade Wall Street Financial, Wolf Popper Financial and Zions Direct. Bank of America declined to be included this year because the firm’s pricing and commission schedules will change in 2009 due to the acquisition of Merrill Lynch (a firm that has not been included in the AAII survey because it is not a discount broker). The firm is expected to participate in next year’s survey.

    Comparing the commissions charged among the discounters, as well as their other fees and services, can help you ensure you are making the right choice for the amenities you need. And with an eye on bargains among the discount brokers, do-it-yourself investors can realize significant savings.

    What does the listing cover?

    Commissions & Fees

    The stock commissions charged by discount brokerage firms vary widely, not just by amount, but also by the way in which they are determined. For instance, some discounters’ rates are based on the dollar value of the transaction, others’ rates are based on the number of shares in the transaction, some use a combination, and some simply provide a table that lists the prices for various transactions without providing any formulas. Brokers that do most of their business on-line tend to charge a flat rate, with a flat surcharge for broker-assisted trades.

    This makes generalized comparisons impossible, since certain firms will be cheaper for some kinds of trades, yet more expensive for others. To help overcome that problem, our listing first presents three broker-assisted trades that cover a range of possibilities for the typical individual investor: a modest trade of a higher-priced stock (100 shares at $50 per share, a $5,000 transaction); a large trade (500 shares at $50 per share, a $25,000 transaction); and a modest trade of a low-priced stock (2,000 shares at $5 per share, a $10,000 transaction). Commissions charged by each broker for these trades are presented in total dollars and as a percentage of the total transaction. Sample commissions for broker-assisted trades that are based on a flat-rate comisison schedule are bolded.

    The trades reflect commissions for exchange-listed stocks; however, some firms charge a different rate for stocks traded over the counter. The minimum commission amount represents the minimum dollar amount charged for any broker-assisted stock trade by the firm.

    For brokers that offer on-line trades, we present the commission for a sample market order trade of 500 shares at $50 per share, along with its percentage of the total $25,000 transaction. On-line commissions based on a flat rate are bolded, and the maximum number of shares that can be traded at the flat rate is noted in the next column. On-line commissions may vary for NASDAQ and over-the-counter stocks and orders placed using a non-market order (limit order). Forty-three of the discount brokers listed here offer trading through the Internet.

    At the end of the listing, we have indicated the average, the highest, and the lowest charges and percentages for each trade as a point of comparison.

       AAII Broker Survey: How the Most Popular Rank
    Wells Fargo is the top-rated brokerage firm on AAII.com in terms of trade price and thinkorswim ranked highest in terms of execution speed, according to our Member Broker Survey for 2008. Scottrade is the most widely used firm among members who took the survey. The firm ranks fourth in terms of trade price and third in execution speed among the most popular brokers.

    The Member Surveys area of AAII.com offers members the opportunity to voice their opinions on the discount brokers they use. The survey asks members which discount broker they use and the primary reasons for choosing a broker. It then asks members to rate their satisfaction with their broker on a number of specific criteria.

    The table below provides rankings for the 13 most popular brokers—those for whom we received 10 or more member responses during 2008. We determined a rating for each broker based on member responses, and then ranked the brokers based on their rating. The table also indicates the percentage of respondents who use each firm; the numbers do not add up to 100% because not all brokers are listed. While Banc of America Investment Services appears here because they were included in our on-line member opinion survey, the firm declined to participate in the broker guide this year due to a fee structure in flux as they absorb Merrill Lynch.

    The table shows how each broker ranked relative to the others in terms of:

    • Trade Price: The price at which an order was filled and how close it was to the price when placed;
    • Execution Speed: How quickly an order is filled;
    • Reliability: How well you are able to access your broker when you wish to; and
    • Overall Satisfaction.

    The brokers are listed in order of their price ranking, the key factor members used to choose a broker.

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    The sample transactions should give you some basis for comparing the various firms. However, certain discounts as well as additional charges by some firms may not be reflected in these particular examples. Other discounts offered by a few firms include:

    • Trades of a large number of shares, for instance over 1,000 shares per transaction.
    • Trades of a large dollar volume. A few firms, in fact, offer special accounts for customers who consistently trade in large volume.
    • Account balances above a certain dollar amount. Where this discount is offered, the account size and discount are negotiable between the broker and customer. Brokers offering a discount for large accounts are noted by a checkmark in the Account Size column under Commission Discount in the listing.
    • Accounts in which frequent trades are made. This type of discount is also usually only offered on a case-by-case basis. Brokers offering a discount for frequent trading are noted by a checkmark in the Frequent Trades column under Commision Discount.
    • Trades made using a touch-tone phone.

    Examples of charges that may not be reflected in these examples include:

    • Shares that are particularly low priced, such as stocks selling for under $5 a share.
    • A small number of firms levy extra charges for odd lots (any number of shares less than 100—for instance, a sale of 553 shares consists of five round lots of 100 and an odd lot of 53 shares).
    • A number of firms levy extra charges for non-market orders such as limit and stop orders. A checkmark in the Limit Orders Higher column denotes firms that charge extra for placing limit orders.
    • More brokers are raising their fees for special handling, such as transferring an account to or from another broker or registering certificates in the owner’s name and mailing it to the owner. These charges are shown in the table under Fees. Many brokers charge a fee for accounts that post no activity for a period of time. In the majority of cases, the fee is triggered after an account has been idle for one year; however, some on-line brokers have instituted quarterly or monthly inactivity fees. A few brokers charge a fee when the account balance falls below a certain amount, but in some cases the fee is waived for active accounts.

    Minimum to Open. Some discounters require a minimum to open an account. This can usually be met by sending the broker either cash or securities.

    Cash Balances. Investors want assurance that any cash balances in their accounts are earning interest. Most discount firms sweep cash balances into either an interest-bearing money market fund or bank account until those funds are reinvested. Money market funds usually pay a higher rate of interest than bank accounts, and some brokers that sweep into bank accounts will offer a money market fund alternative if you request it. In the listing, we indicate if a brokerage firm automatically sweeps into a money market fund or an interest-bearing bank account. For brokers that use a bank account as the automatic option, we note whether a money market fund alternative is available. The table also shows any minimum cash balance that the firm requires before initiating the automatic sweep and the interest rate paid on any balance as of November 30, 2008 (note that rates have dropped substantially relative to last year’s survey). [For more on cash sweep accounts, see the box below.]

    Research and Other Services

    Price isn’t the sole consideration for most individual investors when selecting a discount broker. Other services provided by the firm are also important considerations.

    SIPC Coverage. All of the firms in the survey have SIPC coverage, which insures (through the Securities Investor Protection Corp.) the securities and cash in customer accounts up to a maximum of $500,000 per customer. In addition, all but two of the firms in the survey have purchased additional private insurance protection for their customer accounts; the maximum dollar amount varies among brokers. The firms without additional protection are designated by the symbol [D] before their names. (See the box on page 19 for more on the SIPC.)

    Other services provided by discount brokerage firms vary, and in the listing we include the most popular ones:

    • Margin Accounts. All the firms in the guide offer margin accounts, which allow you to borrow money from the broker to buy securities. The NYSE and NASD require a deposit of $2,000 (or 100% of the purchase price of the security, if less) as minimum margin; the listing incorporates this $2,000 exchange requirement as a minimum and then lists any broker-required minimum. Interest rates charged on margin accounts vary and are shown in the table as the rate on a $10,000 debit balance as of November 30, 2008.
    • Other Securities Handled. Most discount firms offer no-load mutual funds for their customers; while many charge a fee for the transaction, many discounters offer a certain number of no-load funds at no charge to the customer. Investors interested in this service should request a list of the funds offered from the discounter, as well as the charges. Brokers may also offer securities such as exchange-traded funds, bonds and options to their customers. These are noted in the listings. If you are interested in these securities, be sure to request a schedule of the appropriate fees.
    • Research. Some discounters offer research information and investment recommendations on various topics, such as the economy, business conditions, and specific companies. More than half the brokers in our guide offer research supplied by an outside source. The listing indicates which discounters provide standard research reports such as S&P stock reports or analyst reports. A few discount brokers maintain in-house analysts who perform custom research. Brokers may charge for research information; those that do are noted. Remember to check whether research is available through a broker’s Web site for free (noted in the Available at Web Site section of table).
    • Free Check Writing. Three-quarters of the firms allow you to write personal checks against the cash balance in your brokerage account. This is usually a free service provided by the broker.
    • Self-Directed IRA. All but one of the firms in the survey offer self-directed individual retirement accounts. IRA accounts can have different minimums than regular accounts at brokerages, so be sure to check the requirements when setting up an IRA. Also, many brokers charge a fee to set up an IRA account and an annual fee to maintain the account. These minimums and fees are noted in the listings.
    • Dividend Reinvestment Plan Arrangement. Forty-six of the discount brokers will allow an investor to automatically reinvest dividends through the firm. We indicate if the firm offers this arrangement for all dividend-paying stocks; currently, only one of these firms charges a fee for the service.
    • Direct Clearing of Trades. Some brokerage firms, particularly smaller ones, use other brokers to clear their trades. Some investors feel that firms able to clear their own trades may offer somewhat better execution of trades.
    • Touch-Tone Phone Trading. One-third of the firms offer an electronic option of receiving information and placing trades through the customer’s telephone. In most cases, commissions on trades placed using a touch-tone telephone system are discounted (Commission Discount), ranging from 11% to 63% below the regularbroker-assisted commission rate charged.
    • Tax Lot Accounting. Some firms are offering better tax-lot accounting tools for their customers. The most sophisticated programs automatically update the cost basis of positions to reflect wash sales and corporate actions, such as mergers and splits. This leads to accurate capital gains calculations throughout the year and makes it easier for investors to spot and select specific tax lots when buying or selling shares to recognize maximum or minimum gains or losses. Some discount brokerage firms will also allow you to select specific shares when trading on-line.
       Know the Deal on Cash Sweeps
    Your money should be working for you even if you are temporarily parked in “cash” at your brokerage firm. This is particularly true now, when interest rates on short-term cash holdings have dropped substantially, to below 1% among certain firms.

    Brokers differ on their cash balance offerings. Some offer to sweep cash balances into money market mutual funds, while others offer sweeps into accounts that are deposited in an affiliated or third-party bank, and some offer several choices.

    The primary point to keep in mind is that your brokerage firm has no obligation to seek the highest rates available when it comes to the cash in your sweep account. In fact, your brokerage firm may receive payments for introducing your cash sweep account to a bank, which may, in turn, pay a lower interest rate on your funds.

    To protect your investment dollars, the New York Stock Exchange suggests you ask these questions concerning the cash sweep account:

    What choices are available for cash balances?
    You should compare the rates available on common money market instruments, including short-term and long-term money funds, certificates of deposit or Treasury bills and notes, as well as the bank deposit sweep program that may be offered by your brokerage firm. You should also inquire if your brokerage firm offers choices for cash sweeps that include money market alternatives, and compare the benefits of having your cash balances swept to a bank (for instance, possible FDIC insurance coverage) versus the money market alternatives (possibly higher rates).

    Are these introductory rates and, if so, what is the longer-term rate?
    Some firms offer an inducement to sign on to a new program with “tester” rates of limited duration.

    If my funds are being swept into a bank deposit account, whom do I call to gain access to these funds?
    Because some brokerage firms have arrangements with banks that allow recordkeeping to be done by the brokerage firm, the bank may not know the name of individual customers. So, ask your broker or customer service representative—especially when you open the account or at the inception of the bank deposit arrangement.

    How long will it take to obtain my funds?
    The length of time will vary according to your brokerage firm.

    Does my brokerage firm need my consent to move my cash balance from one investment to another?
    Some brokerage firms have contractual language in their customer agreement—that may have been signed before implementation of a new program or changes to an existing program—that gives the firm the authority to adopt or amend the cash sweep plan without further consent from the customer. Often, disclosure of changes to existing plans may be made through newsletters, statement stuffers or similar mass-mailed documents. If you wish to revoke your consent to a bank sweep, talk to your broker or customer service representative.

    Web Services

    Discount brokers that maintain a Web site may provide services to customers through the Internet, whether or not they offer on-line trading. Several brokers in our guide offer tax lot accounting software or tools on their sites so that customers can track the tax status of trades on their computers. Forty-seven of the discounters allow customers to download portfolio account information from their sites for use in software programs. However, several only offer tax lot tools or portfolio downloading to customers who place all their trades on-line; these are footnoted in the listing.

    An additional feature of brokers with a presence on the Internet is the availability of research reports on companies. The range of information offered is wide—from current quotes and news headlines to in-depth financial statistics. Some Web sites charge for this information, and others provide it free to customers. Free Web Research and Free Real-Time Quotes are indicated in the listings where available.

    Internet addresses are listed, but trading through the Internet is only available with the 43 brokerage firms that show on-line sample commissions. More details on the on-line brokers are available in the January/February 2009 issue of AAII’s Computerized Investing publication.

       SIPC: What Does It Cover?
    The Securities Investor Protection Corporation (SIPC) helps customers of failed brokerage firms retrieve their cash and securities. It is a nonprofit group that is overseen by the SEC. All U.S. broker-dealers are required to be members of the SIPC and they provide its funding.

    Its importance has been highlighted recently by both the bankruptcy of Lehman Brothers, as well as the uncovering of the Ponzi scheme at Bernard L. Madoff Investment Securities. In both instances, the SIPC stepped in to oversee the liquidation of assets in an effort to return cash and securities to customers, and to cover the claims of customers up to the insurance protection limits.

    SIPC Coverage and Limits

    Cash, stocks, bonds, mutual funds and other SEC-registered securities are insured up to $500,000, including up to $100,000 for cash.

    Investments that are not eligible for SIPC protection include commodity futures contracts and currency, as well as investment contracts (such as limited partnerships) and fixed annuity contracts that are not registered with the SEC.

    SIPC insurance does not protect investors against stock market risk or broker fraud (such as deceptive selling). Market risk, of course, is a normal part of trading securities. Fraudulent activity, such as deceptive selling schemes, falls under federal and state securities laws, therefore, the SIPC is not involved.

    What Happens

    When a brokerage firm fails that owes customers cash and securities, SIPC usually asks a federal court to appoint a trustee to liquidate the firm and protect the customers.

    Typically, the SIPC calculates the value of a customer’s account as of the date the SIPC files for court protection, which may be higher or lower, due to market fluctuations, than when the broker actually closed its doors.

    When the SIPC steps in, customers get back all securities that already are registered in their name or are in the process of being registered. Then, the remaining customer assets are divided on a pro rata basis, with funds shared in proportion to the size of claims. If sufficient funds are not available in the firm’s customer accounts to satisfy the claims, reserve SIPC funds are used to supplement the distribution up to the SIPC coverage limit ($500,000 per customer, including a maximum of $100,000 for cash claims).

    Wherever possible, the actual stocks and other securities owned by a customer are returned to him or her. SIPC’s reserve funds are used, if necessary, to purchase replacement securities (such as stocks) in the open market.

    Most customers can expect to receive their property in one to three months. When the records of the brokerage firm are accurate, deliveries of some securities and cash to customers may begin shortly after the trustee receives the completed claim forms from customers, or even earlier if the trustee can transfer customer accounts to another broker-dealer.

    Delays of several months usually arise when the failed brokerage firm’s records are not accurate. It also is not uncommon for delays to take place when the troubled brokerage firm or its principals were involved in fraud.

    Your Claim: Keep Good Records!

    If your brokerage firm fails, you will need to fill out a claim form, which will include a description of the cash and securities that are owed to you. The court-appointed trustee will compare what you claim against the books and records of the brokerage firm.

    SIPC and court-appointed trustees assume that the brokerage firm’s records are accurate. However, there are instances of mistakes in brokerage firm records.

    For your own protection, it is important to keep copies of trade confirmations, as well as your latest monthly or quarterly statement of account from your brokerage firm. If you ever discover an error in a confirmation or statement, you should immediately bring it to the attention of the brokerage firm in writing, and you should keep a copy of your correspondence. If there is something wrong with the brokerage firm’s records of your account, you will have to prove that, or SIPC and the trustee will assume that the firm’s records are accurate.

    Checking for SIPC Membership

    Keep in mind that SIPC only protects broker-dealer customers as long as the broker-dealer is an SIPC member.

    You should be aware that some SIPC members have affiliated or related companies that are not members of SIPC, some of who have names that are similar to the name of the SIPC member. Be sure you receive written confirmation of each securities transaction in your securities account with the SIPC member, and that each confirmation statement and each statement of account is issued by the SIPC member and not by a non-SIPC affiliate.

    Note in particular that when you are checking out a broker and asking about SIPC coverage, you must also find out who clears trades for the firm. If your broker does not clear trades directly, ask who the clearing firm is and check on their SIPC membership, since the clearing firm is the entity that actually holds your cash and securities.

    To make sure you are dealing with an SIPC member, look for the words “Member SIPC,” which appear in all signs and ads of SIPC members.

    If you have a question as to whether or not a particular firm is a member of the SIPC, you can call the SIPC Membership Department at 202/371-8300 or visit the SIPC Web site at www.sipc.org.

    Jean Henrich is managing editor at AAII.


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