Monday, March 13, 2006

Your Personal Best Broker

LOTS OF FACTORS GO INTO CHOOSING which online broker is best for you. As noted in our annual roundup ("Different Strokes for...” March 6), you should look beyond simplistic considerations, such as commissions.

Indeed, as prices drop to a point where they’re no longer much of a factor, customers need to look more deeply at a broker’s offerings and find those that suit their needs or are developing features to meet them. Customer service becomes the differentiating factor once fees of $10 per trade are ubiquitous.

A few of the brokers have actual bricks-and-mortar offices you can visit. Scottrade continues to open new offices, while E*Trade is installing financial centers in key urban areas. Schwab has a significant physical presence. And you can still find TD Waterhouse offices, although, as that firm is being absorbed fully into Ameritrade, their future is uncertain. Fidelity also has been adding offices for its brokerage and mutual-fund customers. For the most part, however, you have to be comfortable online to be a truly satisfied electronic investor.

One consideration is the size of the broker. Some readers say they shy away from smaller firms because they’re uncertain about whether the companies will be around tomorrow. But some prefer smaller firms because of the service they offer, which can be superior to that of the behemoths. Others find that a mid-sized firm is “just right.”

The table here classifies the brokers in our survey according to three measures of size: number of accounts, average assets per account and the number of trades per year per account. If you’re a frequent trader with a lot of assets, you may be happiest at a broker that caters to high account balances and peripatetic trading. If you’re planning to open an account with less than $25,000 and don’t plan to trade very often, check out the brokers who have attracted similar investors.

Looking ahead, we expect continuing consolidation, not only among existing brokerages but also among exchanges and liquidity providers. During the preparation for the annual broker survey, one reader quipped, “Maybe I should just move my accounts to E*Trade or Ameritrade now, so I don’t have to go through another takeover.” Those two major firms have been the main acquirers, and while both want to be king of the online-broker hill, never say never when it comes to future combinations.

“There is no question the active-trader market is consolidating,” says Vincent Phillips, chief executive of Schwab’s CyberTrader unit. “Lately, it seems, most brokers’ primary concern is mergers and acquisitions.” Not all, however. Says the eponymous Charles Schwab, “We have no interest in selling the company. We remain firmly committed to our independence, and believe we serve stockholders best by continuing Schwab’s strategy as an independent company, focused on providing clients with great service at great value.”

Muriel Siebert (http://www.siebertnet.com) thinks the consolidation in trading venues, such as exchanges and ECNs (electronic communications networks), could extend the low price trend. “With advances in electronic trading—and the New York Stock Exchange and Archipelago merger, and spreads continuing to narrow—there may exist the opportunity for more price cuts.”

Most brokerage executives aver that commissions have gone about as low as they can go—not surprising, given that you can pay as little as $1 a trade. Neville Golvala, CEO at ChoiceTrade, states, “I believe we have reached the saturation point and do not expect any further decreases in rates.” Rich Hagen, COO of newcomer TradeKing, says, “It would be hard, we think, for one of the huge publicly traded firms to move down much in price, as the public markets have become used to the inflated profit margins their higher commissions deliver.”

“Pricing is still important, and we’re continually looking for areas to reduce cost for our customers,” says E*Trade’s Michael Curcio. He sees E*Trade’s 2006 focus as “ cementing the relationship with our customers—truly completing our focus on product, price and service.”

Both Curcio and Jeff Carney, president of Fidelity Personal Investments, point to the coming baby-boomer retirement wave as a focus for the next few years. “Nothing will be a larger part of the brokerage business—and financial services in general—than finding new and better ways to service the huge wave of Americans born during the baby boom, many of whom need help saving for and making the transition into retirement,” says Carney.

We’ll see continuing activity in the realm of online security this year as well. E*Trade launched its Total Protection Guarantee in January, which will restore any cash or shares that are removed fraudulently from a customer’s account. Schwab responded by announcing its Security Guarantee in February, which covers 100% of losses due to unauthorized activity.

Customers still have to take reasonable precautions to protect themselves, too. But if you are among the unlucky few who needs to take advantage of these security guarantees, please tell us about your experience.

Published in Barron’s, March 13, 2006. 

Posted by twcarey on 03/13 at 03:50 PM
Published in Barron'sAnnual Broker Review • (0) CommentsPermalink