Friday, April 27, 2007

Disagreeing with Consumer Reports

Consumer Reports has issued their online brokerage rankings, and their list bears little resemblance to the Barron’s results.  The Barron’s survey has such different criteria from Consumer Reports that this should not be much of a surprise.

Reading over the CR results, I don’t get the feeling that they did any hands-on testing.  Also, their target customer is quite different from the target we use at Barron’s.  The Barron’s customer profile is of someone who is relatively wealthy, has at least $100,000 in their account, is a moderately active trader, and is technologically savvy. 

CR’s Money Lab graded firms on the services it says are “most valued by typical small investors.” They looked only at web-based brokers rated them based on grades for trading cost and scope, minimum trade fee, mutual fund programs, the amount of available no-transaction-fee funds, banking and asset management services, the availability of free research and education tools, and customer support.

In contrast, the Barron’s rankings evaluate the trade experience, broker’s technological offerings, usability of the site or software program, what can be traded online (with partial credit given for things that can only be traded via a live broker), research amenities, portfolio analysis and reporting (with an emphasis on tax reporting), the quality of help and means of access, and costs. 

The Barron’s emphasis on the quality of the trade execution, smart-order routing technology (which finds the best bid or offer), and the absence of internalized orders and reliance on payment for order flow were necessary to earn a high rating. CR’s ranking scheme doesn’t consider this at all. 

Our range of offering score considers how many stocks a broker allows their customers to sell short, looks at complex options trading, and the availability of mutual funds, futures, commodities and international trading.  CR just counted up the number of no-transaction-fee mutual funds offered by each brokerage. 

The Barron’s emphasis on portfolio analysis and reporting is also completely missing in the CR ranking.  CR’s cost analysis looked only at the commissions for trading stocks and mutual funds, while Barron’s also considers options trading, margin fees, and any maintenance or software fees levied by the brokers.

I think a key difference is also the Barron’s emphasis on hands-on testing.  We get a trading account with each broker, and run the sites and software offerings through a comprehensive script. 

It’s not at all surprising that our results vary widely.  The firm they ranked first, Firstrade, came in 10th in our web-based category and earned only 3 stars (out of 5) overall.  FirsTrade got the second-lowest trading technology ranking, a mere 0.8 out of 5 points, of all of the brokers ranked.  Their 2nd place firm, E*Trade, was 6th in Barron’s. 

Posted by twcarey on 04/27 at 02:07 PM
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