Stockbroker Beat - The Guide To Choosing An Online Discount Broker

Oops! TD Ameritrade Hacked

2007-09-14T23:49:00.000-07:00

TD Ameritrade announced today that it and its 6.3M customers were hacked recently, exposing potentially sensitive information like client SSNs to the hackers. Apparently, the hackers placed a rogue program on TD's network allowing them access to the company's servers.

Protecting data in the online broker world isn't easy, but it's KIND OF important for discount brokers. And TD has compromised client information before, losing a backup data tape containing customer data in 2005 according to the Privacy Rights Clearing House.

The safety of your information is important. Is your discount broker on the list of breaches? As an online investor, make it a point to know.

TD Ameritrade Pitches Straightforward Pricing - Who Cares?

2007-09-13T16:30:00.000-07:00

TD Ameritrade is currently running a straightforward trade commissions campaign. My reaction -- who cares? TD Ameritrade has a solid overall offer in the discount broker space. They'd be a good choice for many an online investor. Pitching their straightforward pricing, based on the assumption that clients are having trouble calculating commissions seems like lazy marketing to me. Are hidden fees a problem in the online broker world? Yes. Are hidden commissions, no? I've been wrong before, but I suspect this won't be a wildly successful ad campaign. Look for that dude from Law & Order to be pitching something new soon.

Online Broker eTrade Offers Money For Your Rollover

2007-09-12T21:23:00.001-07:00

eTrade is offering investors a cash incentive to roll their IRA into eTrade. The table below shows the offer:

While you have to deposit a lot to get the $500, even $50 free dollars for money that you won't touch for a long time can really add up.However, choosing eTrade simply for this offer isn't wise.There are many reasons eTrade might be an attractive choice among online brokers for an online investor. Determine what's important to you (service, advice, trade commissions...) . Let this be gravy. I like this gravy, however.

Stockbrokers and Subprime Loans

2007-07-26T22:05:00.000-07:00

Our site isn't really about looking at online brokers as investments, but there are times we'll comment on certain topics that could be used to formulate investment theses. A topic on every investor's minds these days is the subprime loan mess. If you don't directly own any potentially implicated financials, you've probably noticed the market getting hit hard in the last few weeks.

While several discount brokers are players in the residential mortgage lending space, they remain relatively small players. Also, while you never know until you know that Schwab and eTrade have clean mortgage portfolios, we think it's unlikely these guys will be profoundly affected - either through their lending or their treasury activities. They just didn't play in those markets to the same extent as other institutions. Now, the tricky thing about this emerging mess is that as rates rise, it could affect borrowers without fixed rate loans, who have difficulty paying their mortgage. Such a scenario could impact the portfolio of a discount broker, but then again, mortgage to Schwab is a growing, but small part of its business.

This isn't an endorsement to buy Schwab or Etrade. For many reasons, they might not be suitable investment for you. But remeber when researching investments at the stock level, be sure to never paint each stock with the same brush. Schwab can be lumped as a "financial stock" with Countrywide, but Schwab and Countrywide have totally different businesses.

Discount Broker Review: Scottrade

2007-06-29T11:23:00.001-07:00

Today, we review to one of the bigger and better known online brokers - Scottrade. While a part of me has always been turned off by the repeated mimickry of Schwab, from products, offers, and advertisements to CEO Rodger Riney, who is even beginning to eerily resemble Charles Schwab, I do admire how successful this company has been. While privately held, publicly available metrics about Scottrade suggest a steady surge in assets and trades over its life. What they've done is taken Schwab's philosophy and tried to provide most of the same at a slightly lower price. While they are not as comprehensive in their offer as Schwab or Fidelity, for example, they offer good products and service at a fair price. And how can you not admire that?

At Scottrade, you can trade a variety of instruments including stocks, options, etfs, and mutual funds. Like larger discount brokers, it offers basic trading tools as well as those for the advanced trader. Some fairly recent comments posted on the site Broker Review don't paint the trading platforms in a very good light. If you are an active trader, you should read them, but I'd also caution that it wouldn't be terribly difficult to find negative comments about most brokers if I spent enough time seeking them out.

Overall, the Scottrade offer is relatively simple online. Since a recent redesign, there's less overall site density with just four main tabs. There are some nice features like balances on the trade screens that are useful for even less active traders. For active traders, if you don't want to trade through a software application, Scottrade offers a free, web-based application with streaming quotes, charts and news. It's a nice service, especially when it's free.

Scottrade's trading commissions are low. Stock trades are 7.00, while options trades are the same plus 1.25 per contract. There are lots of no load mutual funds with no mutual fund fees. Scottrade fees are competitive and there no inactivity fees.

Another big plus for Scottrade is it's 301 national branch offices (again, eerily similar in number to Schwab). At $7 trade, it's still nice to know you have a lot of options to find a human being when you need one.

In summary, Scottrade is kind of the vanilla ice cream of the stockbroker world. It doesn't have the greatest tools, the widest variety of products, the lowest commissions, but it's solid across the board and, for most self-directed investors, would be a fine place to put your money.

E*Trade to Launch International Market Access

2007-06-27T21:31:00.000-07:00

E*Trade is launching international trading beginning in July. Investors will be able to buy and sell international stocks (in foreign currency) in Canada, France, Germany, Hong Kong, Japan and the UK.

While some active traders/insomniacs/foreign born U.S. residents will be really excited by this new development, it's probably a lot easier to simply buy an international mutual fund. In our humble opinion, this is a great example of financial service firms habit of "performance chasing". Whenever an asset class (stocks, International etc.) or sector (think tech bubble) has been hot for a few years, the industry rolls out lots of new products to allow people to invest in it. Unfortunately this is generally the worst time to get in.

In this case E*Trade even uses the recent rise in international stock markets to plug investing in them - of course including the standard disclaimer "Past performance is not an indication of future results" in the fine print.

TD Ameritrade Brokerage Promotional Offer

2007-06-24T13:19:00.000-07:00

Just keeping tabs on the special offers out there. TD Ameritrade is currently running a good promotion for new clients. Customers funding a brokerage account (not retirement accounts) with $25,000 or more will receive $100 cash plus free trades for 45 days. Accounts funded with over $2,000 but under $25,000 just get the free trades - not the cash.

You'll have to act fast - the offer expires June 30. Note - it's only equity trades, and they must be executed online.

It's about as attractive as Fidelity's recent promotion in partnership with United airlines that we wrote about in May. Our general thought on these offers is that it's nice to pick up the bonuses (miles, cash, free trades) - but ultimately it's not that much money. That said - if you are thinking about switching firms or opening a new account, you should look for promotional offers at your top choices - may as well pick up the bonus. Check back with us - we'll do some of the legwork for you.

ETF Fees Aren't Always Less Than Mutual Fund Fees

2007-06-19T23:48:00.000-07:00

Here at Stockbroker Beat, we are fans of low-fee investment vehicles that help you build an inexpensive and well-diversified portfolio with a number of discount brokers. Often times, either good mutual funds or etfs or some combination thereof, can do the job. While you've read us trumpet the benefits of ETF investing and the low fees associated with investing in etfs with online brokers, a good recent article in the Wall Street Journal wisely points out that etf investing is not without its pitfalls. You can read the full article by Eleanor Laise here

Among the points she makes that should give investors pause are the short track record and the dubious indexing. But the one that most caught our eye and bears a quick discussion is her take on fees.

She points out for example that Powershares sector etf funds have expense ratios ranging from .6% to .95%. While these are lower than average actively-managed mutual fund fees, there's a lesson here (one we are hopefully continuously reinforcing).

In a word, do your homework. Before you buy any investment product, take the time to find your expense ratio and make sure that it is the right vehicle vs. comparable etfs and mutual funds. We still maintain building a portfolio of low-fee etfs through Zecco with its zero trading costs, can be a very smart strategy for building a low-fee portfolio, but if and only if the funds you choose are indeed low-fee funds.

Again, there are other reasons to choose a fund, but remember that high fees kill investment returns over the long haul.

Target date funds and fees

2007-06-18T20:59:00.000-07:00

The Wall Street Journal had an interesting article today about mutual fund fee disclosure. This is important information for people using a "target date" or "lifecycle" retirement fund which invests your money in several additional mutual funds. Typically these products use a mix of several funds (all run by the same mutual fund family) to create a balanced portfolio of U.S. stocks and bonds, international stocks and bonds, and cash.

Previously funds only had to disclose the management fees associated with the main fund and weren't required to report the management fees being paid on the underlying funds. The Journal gives a few examples of horribly expensive funds - including the "UBS Multi-Strat Fund" with a whopping 12.11% expense ratio. That's pretty steep.

While the examples given in the Journal article were pretty small and obscure, I would definitely checking out the expense ratios on any of the multi-asset class funds you hold currently now that it's easier to see the true cost. Just go to the website at Schwab, Fidelity, E*Trade in the mutual fund section - all the data there should be pretty current.

Bond trading just got cheaper at Schwab

2007-06-12T21:29:00.000-07:00

Schwab announced new pricing for bond investors today. While brokers charge a specific commission for buying and selling stock, on bond trades brokers typically make money by charging a "mark up" on bonds that isn't obvious to the customer. Schwab's new pricing scheme makes it all transparent and it's an attractive offer. Here's the basics...

Online Trades
Treasuries (bonds, bills, notes, TIPS - secondary market) $0
Other bonds (corporates, C's muni's etc.) $1 per bond ($10 min/$250 max)

An additional $25 fee applies if the trade is conducted over the phone.

Discount Broker Review: Zecco

2007-06-11T21:47:00.000-07:00

Yep. We're writing about Zecco again. We aren't lazy. We're efficent and Zecco is still top of mind. So without further ado...

Today's Discount Broker Review: Zecco

Its name is a twist on its trademark offer - zero commission trading. We like low trade comissions, so logic might dictate we love zero trade commissions. While there's a lot to love about zero trade commissions, there is a lot more to consider when choosing an online discount broker. Still, when you consider Zecco isn't even a year old, they've built a decent suite of investment tools, some even groundbreaking.

What stands out on Zecco is its community features. Zecco is the first online broker to offer such a robust community. While you can find busy message boards on Yahoo finance, great blogs on The Street, Seeking Alpha, or Stockpickr among others, no one yet combines these features with a social network that allows you to share your portfolio and search other client portfolios (tickers and percentage changes, no values) to discover new stocks to round out your portfolio. While the execution of this round of Zecco's social network isn't perfect, it's a good first step to what could be a new way to find ideas to trade stocks.

As for Zecco's trading commissions across investment type -- like the name implies, they aren't just low, they are as low as ZERO. That's right, stock trades are 0.00, while the price to trade options is 3.50 plus .65 cents per contract. Mutual funds are 10.00, so Zecco is not yet comparable to Schwab, for example, for mutual fund investors.

You won't get great cash yields at Zecco either, while margin rates are competitive. Again, for great checking account cash yields and lots of options for longer term cash investments, Schwab is a standout in the space.

Zecco's $0 minimums and an absence of inactivity fees, mean high investment fees won't be eating away at your returns. I wouldn't mind seeing Zecco ditch the pinkish-purple, but I like it's unique social networking and community features.

Zecco isn't for everyone. It's really lean for mutual fund investors. But if you want to try a new way to generate ideas to trade stocks or you want to build a low fee portfolio, particularly a low fee ETF porfolio, through dollar cost averaging, Zecco can be a solid choice.

Option Traders: Option Pundit - No Profit, No Cost

2007-06-11T21:35:00.000-07:00

If you trade options, we want to alert you to a site we discovered for options traders. If you are looking for someone to educate and provide guidance for you to trade options, this might be the site for you.

One thing we love about it: it's pay for performance -- if the Option Pundit's trades don't make money, you don't pay for the monthly newsletter. Click here to check out the Option Pundit.

TD Ameritrade merging with E*Trade? Implications

2007-06-09T16:56:00.000-07:00

There's been a number of stories in the media this week about TD Ameritrade potentially merging (again) with either Schwab or E*Trade. Does this mean anything for an investor using either firm? If merger does happen - expect client service problems at the combined firm, as reps need to learn new computer systems, account forms, and other business processes. In addition, there are always minor technical glitches when financial services companies merge, including the recent merger of TD Waterhouse and Ameritrade to form TD Ameritrade.

If you have an account with the firm that is bought - you may have to fill out new account forms and will wind up with new account numbers that conform with the buying company's systems. If that's the case - you may as well think about switching firms - it doesn't hurt to re-evaluate your decision and you might save some cash in the process.

Zecco - no minimum balance, no trading commisions

2007-06-07T21:11:00.000-07:00

Zecco annouced this week that they were eliminating their required minimum account balance to open an account. This was previously set at $2,500. If you are just beginning to save, it's a nice way to go - since commissions in a smaller account eat up your returns pretty quickly and Zecco has free trades on stocks (up to 40 a month). I'd probably suggest purchasing a broadbased ETF like the Vanguard Total Stock Market ETF (ticker: VTI) rather than individual stocks with such a small investment portfolio. VTI tracks the entire US stock market - so you get a diversified Since ETF's trade like stocks the trade should be free, and VTI only charges a 0.07% management fee, making it a cost effective way to play the market.

Discount Broker Review - Trade King

2007-06-06T22:26:00.000-07:00

At Stockbroker Beat, we generally turn our attentions to the better known online brokers and typically don't cover the smaller discount brokers. But from time to time, we want to give some of the smaller guys their due. You can find good tools and good prices with discount brokers you've never heard of, so from time to time, we'll bring one to your attention.

Today's Feature: Trade King

The name has always made me chuckle, but I've never discounted (haha!) this discount broker. At Trade King, you can trade stocks, trade options, trade etfs, trade mutual funds, trade bonds, trade certificates of deposit, and trade treasuries. But where Trade King excels, besides its clean interface, is its impressive suite of tools for active traders - both stock traders and options traders.

Among the more impressive tools are it's probability calculator, which assesses the most likely outcome of options trades. Trade King also offers some great charting features and a wealth of screeners for etf trading, stock trading, and options trading.

Trade King's trading commissions are low. Stock trades are 4.95, while options trades are the same plus .65 cents per contract. Mutual funds are one trade that are not a bargain at 14.95, but unlike Fidelity or Vanguard, Trade King is not really a destination for mutual fund investors.

Cash yields aren't impressive at 1%. You can do a lot better at Schwab with its new checking account or with http://www.stockbrokerbeat.com/2007/05/etrade-offers-505-apy-etrade-complete.htmla and it's eTrade Complete account.

https://www.tradeking.com/PublicView/services/Services/commissionsPUB.tmpl at Trade King are pretty standard, but the absence of inactivity fees is a plus.

All in all, Trade King has a solid offer. The site is easy on the eyes and easy to use and offers a nice selection of trading tools along with its low commissions. I also need to give a special shout out to Trade King's transparency on its account management fees and trading commissions and solid demos of capabilities. At Trade King, it's easy to know what you'll get and what it'll set you back to get it.

Fly United on Fidelity's Dime

2007-05-28T21:18:00.000-07:00

Fidelity brokerage is running an attractive promotional offer in conjunction with United Airlines right now. If you open a standard brokerage account (not a retirement account) with Fidelity brokerage – depending on the amount deposited, you can earn a chunk of miles – up to 25,000, which is good for a free domestic ticket – probably worth in the neighborhood of $300.

$50,000 = 25,000 miles
$10,000 = 15,000 miles
$2,500 = 5,000 miles

See Fidelity Brokerage for the offer details.

If you are currently using another brokerage firm, you don’t need to sell your investments to transfer your account. Fidelity (or any other brokerage firm) will get in touch with your current brokerage firm and simply move the securities if you request it. Sometimes people don’t realize this and wind up selling investments and incurring unnecessary capital gains taxes in the process.

In general, we’d say you shouldn’t leap at a lot of these promotional offers without careful consideration – the differences in cash yields – as well stock and mutual fund commission structures may not make it worth your while - so do the math first. There aren’t really any restrictions on what types of investments you have in the account – so there’s no real downside to this particular offer. If you like to fly United – snap it up.

eTrade Offers 5.05% APY -- eTrade Complete Savings Account

2007-05-27T18:23:00.000-07:00

Not to be outdone by Schwab and the new Schwab checking account, eTrade offers its eTrade Complete Savings Account with a 5.05% APY. While the interest rate is higher than the Schwab offer, keep in mind that it's a savings account, not a checking account, making the Schwab Account with no ATM fees, free checks, and free bill pay, particularly impressive. Still, the offer is nothing to sneeze at, besting much of what's out there in the competitive space. With eTrade's strong user experience on the site, it's also easy to quickly and easily get to your money, making it another good, highly liquid option for those who want high returns and low fees to increase their investment returns.

Schwab Offers 4.25% APY On Checking

2007-05-23T22:33:00.000-07:00

What do we like at Stockbroker Beat? Low Fees, High Returns. Whether it's cash investing, mutual fund investing, or stock investing, low fees are a key component of good investment returns. So too are high cash yields. While there is no guarantee of returns on mutual fund investing or stock investing, you can get a guaranteed return on the cash in your checking account. With that in mind, the Schwab Investor checking account with its low fees (free checks, no ATM fees, and free billpay) and it's 4.25% APY, which is way above the national average on checking accounts, sounds pretty darn good, doesn't it? Well, it is that good. Why keep a checking account at a bank if you can get this from Schwab? I'm not sure if this will take off, because checking account relationships tend to be very sticky, but this is a great product from Schwab and one you should check out.

Zecco - When Do $0 Commissions and Free Stock Trades Matter?

2007-05-20T23:21:00.000-07:00

Zecco launched to some fanfare with $0 stock trade commissions in September. I wrote what was perceived to me a more negative piece than I actually believed it to be. My thesis (and it hasn't changed) is that $0 commissions in of themselves won't make Schwab, Fidelity and others shiver, because price disintegration already happened in the brokerage industry. And it can still go lower? Schwab now gets less than 20% of its revenue from trade commissions. Can they go to 0 without financial ruin? Of course. But that was a TechCrunch post. This is a Broker Guide post, so I want to answer a different question.

When and how can $0 stock trading commissions matter to you? Quite simply, if, as we frequently allege, fees can hurt your long-term returns, then, of course it's a good deal. But in the end, trading 5-10 times per year, that extra $100 probably won't mean much. If you trade a lot, then sure it can matter. But (while not the focus of this post), Zecco doesn't yet offer the same tool set you'll find in active trader products from the big brokers or from active trader favorites like TradeStation or eSignal. But here's where Zecco can really matter? When you dollar cost average.

Whether you are periodically rebalancing a stock portfolio or maintaining a low-fee ETF portfolio, Zecco can be a great deal. We, here at Broker Guide, think a balanced ETF portfolio would be a great deal if you could minimized trading costs. Guess what? Zecco lets you do that. We'll cover this concept in more detail in a future post.

Advisory Fees Eat Into Mutual Fund Returns

2007-05-15T14:19:00.000-07:00

At Broker Guide, you know we preach low fees as an essential ingredient for good investment returns. We've looked at this from the perspective of the mutual fund investor and in particular, the potentially negative consequences for your investment returns from mutual fund investing with a "full service" broker. A recent paper from professors, Peter Tufano and Daniel Bergstresser of Harvard Business School and John M.R. Chalmers of the University of Oregon assessing the costs and benefits associated with using such a financial advisor to purchase mutual funds. The conclusion is that do-it-yourself mutual fund investors tend to do better than mutual fund investors using a financial advisor. In summary, independent investors average annual returns of 6.6% net of expenses, while investors using advisors average 2.9%. Why? The answer is really quite simple -- advisors levy another fee on top of the fee you already pay the mutual fund company for managing your money.

This is not a rant against financial advisors. There are many cases when engaging a financial advisor on a short or long-term basis makes a lot of sense. But if you plan to assemble a relatively basic mutual fund portfolio that follows basic principals of asset allocation, you are probably better off doing that on your own through a "discount" broker, rather than a "full-service" broker. Schwab, Fidelity, Ameritrade, eTrade, even upstarts like Zecco, offer a wealth of information on portfolio construction. Some, like Schwab, even offering ready-made portfolios.

Remember, investment returns are based on a few key components -- fees are one of those key components. For mutual fund investors, low fees lead to higher returns.

Your Guide To Choosing The Right Broker For Your Investing Needs

2007-05-14T10:16:00.000-07:00

Our blog on the basic of choosing the right broker for your investing needs is in a nutshell -- what you need. Whether you are a beginning investor or an active trader, whether you invest in mutual funds, etfs, stocks, bonds, or cash, whether you care about the cost of equity trades or cash yields, whether you seek a financial advisor or want to do it yourself, whether you want a traditional full service broker or a discount broker, whether you care about trading commissions or mutual fund fees, we are here for you. This blog will be your definitive guide to selecting the broker that's right for you and your financial needs.

Cost Analysis: Transaction fee Mutual Funds and Fund Supermarkets

2007-05-07T22:31:00.000-07:00

Most individual investors have built their portfolio through regular investments in mutual funds. Mutual funds are a great way to gain diversification without doing a lot of work, and are probably a superior approach to investing for the average person. Even if you do wish to trade individual stocks, mutual funds should likely be the core of your portfolio. In this post, we’ll focus on the merits of transaction fee funds and the “no transaction fee” funds found in a typical mutual fund “supermarket”.

Financial terminology can be confusing, but transaction fee funds are different from “load” funds. You really don’t need to and should not pay a “load” for a fund. Essentially with a load fund, you are paying a large fee – possibly 5% of your investment, as a commission to your discount broker. Usually this is subtracted from your investment upfront, and really makes it hard for the investor to earn a decent return. Since load funds as a group do not offer better performance when compared to no-load funds, you should stick with no-load funds and be a few percentage points ahead from day one.

Once we’ve narrowed our choices down to no-load funds, you still need to think about choosing a no transaction fee fund (via a mutual fund “supermarket”) or buying a transaction fee fund and paying a commission. No transaction fee doesn’t mean it is “free” (after all, what in life is truly free?) you just wind up paying for it over time. Here’s how it works. In order to get on the “no transaction fee” platforms at Schwab, TD Ameritrade, Fidelity and other online brokers, the mutual fund companies pay the brokerage firm a fee based on your assets – typically this is 0.30% - which gets included into your ongoing management fee. The extra ongoing fees associated with the “supermarket” approach means that the lowest fee funds can’t afford to be on the platform. But if you are making periodic investments, it may be a better way to go.

The funds’ management fee or “OER” – operating expense ratio is what you pay the fund company to manage your money and can vary between 0.09% and 1.75%. Index funds and bond funds will generally be cheaper than actively managed stock and international funds.

From an investor’s perspective, you need to calculate your costs – the ongoing OER, and the transaction fees required to make your investments.

Let’s look at an example. I’ve selected three index funds designed to deliver the performance of the S&P 500.

VFINX - OER 0.18% - Vanguard 500 Index
PREIX - OER 0.35% - T. Rowe Price Equity Index 500
SWPIX - OER 0.36% - Schwab S&P 500 Index Fund

At Schwab, you will pay a transaction fee of $49.95 to buy the T. Rowe fund (PREIX) but no fee for the Schwab S&P 500 fund. Between these two - you should always buy the Schwab fund – since it has almost the same OER, it is a virtually identical fund, you may as well save the $49.95 per transaction.

So when you do you buy the Vanguard fund, if ever? It depends on how much you will be investing, how long you will keep the investment, and the savings compared to a comparable no-transaction fee fund.

For a typical saver – putting aside maybe $700 a month – the supermarket is the winner.

Let’s do the math.
The difference between the OER’s is 0.18% (0.36% - 0.18%), so on a $700 investment you save only ($700 x 0.18%) or $1.26 per year, so it takes approximately 40 years to recoup your $49.95 commission.

On the other hand, let’s assume you have a bonus, or IRA rollover to invest a large sum – maybe $10,000. In this case, the transaction fee fund is the winner.

Let’s do the math again.
The difference between the OER’s is 0.18% (0.36% - 0.18%), so on a $10,000 investment you save ($10,000 x 0.18%) or $18.00 per year, so it takes approximately 3 years to recoup your $49.95 commission, and then you will save $18 per year.

The savings numbers here are small – I’ve picked some of the lowest cost funds on the market as examples – but now that you know the math, you can also compare more and less expensive funds. Saving 1% a year adds up.

Fees at the major discount firms. (as of March 7, 2007)

Transaction fee mutual fund trades - Online
Charles Schwab $49.95
E*Trade $19.99
Fidelity $75.00 (only on purchase – no charge for sale)
Scottrade $17.00
TD Ameritrade $49.99

Mutual Fund Supermarkets

2007-04-23T23:16:00.000-07:00

In this post, after reviewing the basics of mutual fund investing, we are ready to compare mutual fund supermarkets. After all the buildup in the previous posts, I am a little disappointed in the climax of this educational yarn.

The fact is that the mutual fund supermarkets of the major discount brokerages aren't really that different. The differences are slight enough that unless you have a preference for a few specific fund families, the mutual fund supermarket, particularly the availability of no load funds, should not be a significant factor in choosing a broker.

First off, all the online brokers claim (and likely can support the claim) to offer thousands of mutual funds. The numbers listed across the major discount brokers varied from 4500 - 12,000. Whether the number is 4500 or 12,000, there is tremendous choice no matter where you go.

Another differentiator used to be a list of recommended funds from a broker. Schwab and Fidelity, I believe, were the early leaders with this offering. But their competitors knew a good thing when they saw it and now there are recommended fund lists at least at Schwab, Fidelity, eTrade, and TD Waterhouse.

Third, the availability of low-cost index funds is now nearly ubiquitous.

So... in terms of selection, the differences are slight. In terms of providing basic recommendations, the differences are slight (although methodology and performance likely do vary and can be evaluated later). And they all have index funds these days. So... what are you to do?

Here's a rundown of the different brokers and some of the unique features

Schwab
The good at Schwab is its endemic fund family. Schwab Funds, particularly those based on the very successful Schwab Equity Ratings system, are strong performers. Additionally, Schwab offers the Laudus family of funds to its clients, which are, overall, a small, but strong performing family.

A negative at Schwab. The popular Fidelity fund family is not available without a load.

Fidelity

The best source for the popular and massive family of Fidelity Funds. A negative? A lower total number of no load fund families available, including strong performers like the aforementioned Schwab Family.

Ameritrade & eTrade
An overall larger number of no load families at both firms. eTrade has been slightly more aggressive on the propietary front in the last few years, but their internal fund family remains small.

Vanguard
If you want to compose a portfolio of the popular, low-cost Vanguard funds, here's a logical place for your money (though Vanguard funds are widely available). A negative? Limited number of other fund families available without a load.

Our conclusions remain the same: There just aren't a lot of differences in the fund supermarkets. Remember -- choosing a broker is a multi-variable decision. This particular variable, barring a strong preference for a particular family of funds, shouldn't be one

The Basics of Mutual Fund Investing

2007-04-16T05:00:00.000-07:00

We don’t want to insult anyone, but our experience in the industry leads us to assume that most of our readers don’t know a lot about the basics of investing. As such, we’ll occasionally post about the topic. This is one of this posts. In it, we hope to provide the reader with some fundamentals of mutual fund investing.

First things first, what is a mutual fund?

A mutual fund is an investment vehicle that allows an investor to own a number of different holdings/positions/investments through a single purchase. So, for example, I might own a mutual fund with 100 stock holdings, including GE and IBM. Thus, my purchase of the mutual fund allows me to own GE, IBM and the other 98 stocks in the fund.

Why would I want to own a mutual fund?

There are two reasons we think take primacy. First, when selecting a fund with solid historical performance, you are theoretically buying the expertise of a single or team of stock pickers. You might think you can pick stocks (and maybe you can), but if you are like most investors, you have neither the time nor expertise to effectively pick stocks. It takes a lot of time and buying a mutual fund permits you to buy this expertise. Second, mutual funds (or more so a portfolio of several mutual funds) help you reduce your risk in the market. If your portfolio is in a single stock and that stock is in a company that goes bankrupt, your portfolio is now worthless (think Enron!). If that stock is one of one hundred held in a mutual fund, the impact of the company’s bankruptcy is relatively small on your portfolio. This is not to say that mutual funds are risk free – not even close. Sector funds can be particularly risky. But a healthy collection of funds can dramatically reduce your single stock or sector risk and still give you a shot of beating or matching market returns.

How Do I Buy A Mutual Fund?

Buying a mutual fund is a relatively simple process and will drive a series of upcoming posts. Most brokerages offer a huge selection of mutual funds in what’s called a Mutual Fund Supermarket. Within those supermarkets, there are essentially two kinds of funds: Load and No Load. Load Funds require a transaction fee to acquire a mutual fund. No Load Funds can be acquired with no transaction fee. Typically within a mutual funds supermarket at Schwab or eTrade, literally thousands of mutual funds are available with no fee (No Load).

You might be thinking ‘Why would I ever want to pay a transaction fee?’ It’s a good question, as we here at Broker Guide preach low fees as a cornerstone of successful investing. That’s not to say there is never a time where you’d want to acquire a fund with a load. There could be a specific fund with a specific goal (think emerging markets in Asia) where you might just have to suck up and pay a transaction fee to get into a top performing fund, but typically there are numerous good choices available without a fee.

It’s important to note: No Load Does Not Mean Free. Each mutual fund extracts an annual management fee. These fees typically range from .75% percent of your holding to 2% of your holding. You don’t pay them directly, but they are subtracted from your annual return.

Selecting a Fund

As mentioned, there are literally thousands of funds available within a mutual fund supermarket. We’ll talk about the merits of different supermarkets in our next post. But basically, most of these firms will have a solid set of tools to help you evaluate funds. And what are you primarily looking for? You are looking for funds that give you the highest possible returns with the least possible risk at the lowest cost. Or you might be looking for a single fund to replace a poor performing fund or add a new element to your portfolio.

Either way, when selecting an individual fund, it comes down to return (including the cost/fee to get that return) and risk reduction. Looking at just a couple of key data points will typically give a sense of a fund’s return (annual return and return relative to other funds in the category), annual fee, and risk (there are measures for a fund’s volatility relative to the rest of the market).

Now that you have the basics, we can talk about how to compare the mutual fund supermarkets of leading brokerages.

Discount Brokers Are Better Than Full Commission Brokers For Mutual Fund Investors

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We aren’t going to talk about full commission brokerages when evaluating mutual fund supermarkets, because, quite frankly, they aren’t the place to go if you want a no load supermarket of funds. Full commission brokerages will typically have their own family of funds. And the full commission brokerages are strongly incented to put you in their funds. The fund may not carry a transaction fee, but it will carry a management fee. You will also likely be paying a management fee on your total portfolio, so you might be looking at fees of several percent or more on your mutual fund portfolio. Over time, that will eat a way at your returns.

Let me be clear, this is not a diatribe against full commission brokers. There are a lot of good brokers out there, but their fee structure, in our humble opinion, does not make them an ideal place to construct a portfolio of mutual funds. If you are going to pay a broker, you should expect to soundly beat the market and high fees are the surest way to avoid high returns with your mutual fund portfolio.