J.D. Power & Associates puts out annual customer satisfaction surveys in all types of industries from automobiles to finance to insurance to travel (and many more in between). When they published their annual scores for finance companies late last year, I wanted to write about it to see how some of the companies I work with performed against their peers.

Author’s Aside/Note: I know it’s a little late but this one had been sitting in the hopper and I felt that I should post it anyway.

The Finance category itself is broken up into retail banking, mortgage related, and credit card groups. At the time I first wrote this, I didn’t think the mortgage ratings were that interesting so I skipped over it. I chose to focus on the two services I used more - retail banking and credit cards. While I don’t discuss the mortgage ratings, go check out how well Countrywide Home Loans did (hint: not well).

Retail Banking

The Retail Banking scores were rated based on geographic region:

• Mid Atlantic: Commerce Bank (Bancorp)
• Midwest: Commerce Bank (Bancshares)
• Southeast: Bancorpsouth Bank
• Southwest: Wachovia Bank
• West: Bank Of The West

If you happen to have a Commerce Bank nearby and are a current customer (and you have kids), they’re running a summer reading program where kids can earn $10 for reading ten books.

Online savings account darlings WaMu and HSBC made appearances on the list as well (I looked primarily at the Mid Atlantic listing because that’s where I live, I suspect the scores are similar for the same banks). WaMu scored four points in overall satisfaction (with the highest score of 5 points under the Fees category) and HSBC scored three points. This past weekend we went to a wedding in Williamsport, PA, home of the Little League World Series, and saw scores of Sovereign Bank branches. Sovereign Bank scored a mere two points overall (and across the board). It was also funny to see M&T Bank’s whole name written out, Manufacturers & Traders Bank; I use them for my business banking and they’ve kept me very “satisfied.”

Credit Cards

In the Credit Card Satisfaction category, American Express edged out Discover for the highest rating in overall satisfaction and received the JD Power & Associates award. I personally use the American Express Costco TrueEarnings card because because I shop often at Costco and because it gives me 3% cash back on gasoline purchases (we also use a Discover Open Road card but that card caps rewards). My wife used to like their AMEX Blue card but it was recently replaced with the Citi CashReturns card because of the unlimited 1% cashback (and it once offered a 5% cashback on everything for the first three months).

The three companies that led up the rear with two points (out of five) were Capital One, Bank of America, and HSBC. I’ve never had a credit card from any of those companies. It’s interesting that when you arrange them by Overall Satisfaction (by clicking the sort arrows), HSBC appears below Bank of America. Bank of America has 2 points in all five categories while HSBC has three points for Rewards Program yet still appears below BoA. There must be some granularity within those points not captured somewhere.

Brokers

Finally, the investment broker category was the last of the categories I was interested in and it was broken into Full Service Investment Firm Ratings and Online Investment Firm Ratings. Raymond James took home the award in the Full Service Category and Scottrade (barely edging out Vanguard) took top honors in the Online Investment Firm Ratings.

I thought it was interesting that the only other “discount” online broker that made the list (TradeKing, Zecco, and many others didn’t make the list) was E*Trade Financial and they scored only two points.

With it being August, the 2008 ratings should be coming out soon in a few months. It’ll be interesting to see how much shifting around occurs with some of these scores.

Smart Money named Zecco the worst in customer service in their 2008 Smart Money Best Broker Survey and many of the comments on my Is Zecco A Scam? post seem to echo the experiences of Smart Money’s reviewers. If you read the comments, they range from “Eh, you get what you pay for, it’s not bad.” to “Zecco sucks and Zecco is only for non-serious amateur traders arguing over couple of bucks here and there.” (Lee)

I said I’d fund my account there but I never did. One reason was because I was confused by the two separate logins, one for the community and one for my brokerage account. Then, the comments about the poor customer service starting rolling in and Zecco changed from free trades to 10 free trades if you had over $2,500 in your account, so I decided it wasn’t worth the trouble. The reality is that I opened a high yield savings account and brokerage at E*Trade ($9.99/trade) and then a TradeKing account ($4.95/trade) to write a review of TradeKing. With two brokerage accounts plus my retirement accounts, I figured another one with reported bad customer service wasn’t worth it (especially if I’m trying to simplify my personal finances! I’m going the wrong way!).

In truth, I think that people expect too much from Zecco. While the change in free trades to 10 free trades with a minimum balance was a bit “bait and switch”-y, you’re still getting ten free trades worth at least $50 a month (assuming 10 trades at $4.95 each at competitor TradeKing). But the maxim of “You get what you pay for” still rings true. If you want better customer service, pay the $4.95 a trade (or more); if you don’t care about customer service, then Zecco might be right for you.

On the other hand, should you be trading ten times a month? Most people shouldn’t be trading ten times a month, so your actual total benefit isn’t $50 a month, it’s less. In fact, I haven’t made a stock trade in several months (not that I’m the poster child for a disciplined investor). If you’re more a mutual fund type, you can trade those for free if you open an account at that brokerage. At Vanguard, you can invest in many of their no-load funds without any transaction costs whatsoever. Free trades at Vanguard!

So your trade-off of poor customer service is for a couple of trades a year, which is not worth it in my opinion. And that’s why I never funded my account.

(Photo: comicbase)

TradeKing is running a $50 promotion this month where you can get $50 for opening a new TradeKing account, depositing at least $2500, and making one trade.

I could only avoid the siren song of $4.95 trades for so long, here are my opinions of TradeKing in 2,144 words and 4 screenshots. Last week, I joined the masses and opened a TradeKing brokerage account. I did so partly because I wanted to understand the process and answer some of the emails I’ve been receiving, and partly because I was impressed by their Options Education Center and wanted to dip my toe in the waters of something I never really understood. I had heard that TradeKing offers the easiest way to pull off multiple options related transactions (because they’re often used as hedges) at once. More on that later, let’s get to the basics.

Account Application Process

I opened an individual account (with margin enabled) and Level 1 - Covered Calls options trading. Opening an account at TradeKing takes about five minutes and three screens (plus a confirmation screen). They asked for all of your standard brokerage account information details like name, address, social security, employer information, financial information, trading experience, whether you want to be able to trade on margin and with options, etc. Nothing remarkable, quick and easy.

One interesting security measure they put in place was a pop-up keyboard for the password entry. You click on buttons to enter your password, a measure that seems a bit like overkill, though it’s nice that they thought of it. I’ve never seen a company use that during the account opening process. (this is the same keyboard used for logging on to TradeKing)

After the application process, you are asked to agree to several agreements. The agreements run the gamut of agreeing to accept real time quotes, certifying that you’re a nonprofessional, etc etc. After you agree to all those, you’re allowed to join the TradeKing “community!” Yay!

TradeKing Community

The TradeKing Community is TradeKing’s attempt to leverage the social media craze and create a place where traders can share thoughts, opinions, and ideas. I believe Zecco has a similar Zecco community but very few other brokerages do this. I know for a fact that there is no Vanguard or TD Ameritrade or E*Trade community like the one at TradeKing and Zecco. At the moment, it’s very slick looking but lacks a bit in participation. I’ll explain more later.

The major parts of the community are:

• Community Home (shown right): The community front page captures a taste of every other section of the community, including three huge buttons in the header going to Trading Activity, Trade Notes, and the Forums.
• Trading Activity & Trade Notes: You can trade with funny money and track your progress here, with the aggregate data of trades being listed in Trading Activity. You can tell that the community is still quite small as on this day (May 29th, 2008) the most active stock is Ford with 10 trades. Most of the notes have zero or one vote.
• Groups & Forums: You can think of Groups as almost like forum categories and the forum as the big list of every discussion going on. The groups themselves are still of a reasonable size (Beginning Investors has the most with 126 members) but vary in terms of quality, scope, and purpose. Anyone can start a group, so you have groups with intuitive names like “Value Investing” and then ones that have less intuitive names (Street Addicts is one). Some groups have membership rolls in the single digits (Socially Responsible Investors has one member).

But let’s be honest, you don’t sign up with a brokerage because you want to meet friends, you sign up because you want to make money in the stock market.

Transferring Money

Step one to making money on the stock market, after opening an account, is getting funds into that account. They make it pretty easy, simply go to the navigation menu up top and click on Services > Transfer Money. I went with the ACH transfer, which required the basic information (ABA routing #, account #, etc). Unfortunately, there’s a mandatory minimum five day hold after you setup an ACH link.

After linking my account, you can only have one account link at any one time. If you want to link another account, you have to delete your current ACH linkage and add the other one (including five day wait). Another minor annoyance is yet another five day hold on ACH deposits if they exceed your account balance (if you deposit less than your account balance, there is no hold).

Making Trades

The TradeKing trading screen is pretty slick. I like how you get a quick quote on the ticket you enter into the ticket trade form, it appears immediately with useful information (Bid, Ask, Last, Change, Volume, and Company name). It’s nice not to have to click “quote” or something silly like that. (ignore the fact that my account balance says $0.00, I took the screenshot before making any trades… five days is a long time to wait!)

Disable Preview Step: If you hate previewing your order, it’s nice that they allow you to disable the preview step (you can also setup a default stock and option trade quantity on the same page, though I find that probably won’t be too useful). There is a link underneath the Preview Trade button that takes you to your Settings, then just click the “Bypass Order Preview Screen.” You’ll notice your trading button changes from Preview Order to Place Order. (if you want to change it back, it’s under Services > Settings > Trading & Real-Time Quotes)

One feature that is missing that I found valuable at TD Ameritrade was a floating window that allowed me to trade regardless of the screen I was on. At TD Ameritrade, there was a little Javascript-like form at the bottom of each screen that let me enter in tickers and submit trades even if I was on a general information screen. While it’s hardly a chore to click on trade, having that window was a “nice to have” feature.

Options: The screen to your right is the Covered Call Trading Screen and it, on one screen, lets you buy both the underlying stock and write/sell the Call option to go with it. I’m still very much a novice when it comes to Options, so the terms Butterfly and Condor and all that jazz are meaningless to me, but the Covered Call is something that’s pretty easy to understand. A call option is the right to buy the stock, “call for it,” at a specific price. When you write/sell a call option, you’re selling someone the right to buy a stock from you at a specified price. A covered call means you’re writing a call for shares you already own. This screen lets you buy the stock and write the option, two things at once, and is clearly more convenient than forcing you to buy the stock and write the option on two different screens.

I plan to read more about options trading, enough to become comfortable (I talk about the education center later, where I read their options playbook) and then I may speak to this section in greater detail.

Finally, the backend systems of TradeKing rely on Legent Clearing. Everything from actual trades, securities clearance to settlement is done through Legent and they service a bunch of well-known clients such as Pointe Capital, MyStockFund Securities and OptionsXpress.

Maxit Tax Manager

TradeKing offers a Maxit Tax Manager, by Scivantage Maxit, that tracks your gain and loss, including the following listed features:

• Tracks all transactions and running cost basis of your securities.
• Automatically adjusts cost for corporate actions (splits, mergers, spin-offs, etc.)
• Automatically identifies and adjusts cost basis for wash sales
• Sets default standing orders for matching sells to tax lots such as Minimize Tax, First In–First Out, Last In-First Out.
• Calculates Unrealized and Realized Gains and Losses
• Generates Tax Reports, such as the Schedule D automatically

As of this review, I haven’t really gotten a chance to look too much in depth about this because I haven’t sold anything.

Research

Trading is nice, but what about the information you need to make informed decisions? Most brokerages offer third party reports (or their own analysis) to help you made decisions. TradeKing uses a system called MarketGrader. MarketGrader describes itself as essentially a big quantitative calculator that crunches all sorts of factors and gives you a number. Yep… a number.

In the screenshot to the right, you can see Yahoo’s analysis. Growth got a B-, Value got a B, Profitability got a B-, and Cash Flow scored a B+. End result? A 48.8 and a flashing red Sell rating. If you want more information, the PDF Report doesn’t really provide it. There’s a paragraph explaining each of those four categories with a few pages of pretty graphs and charts. Surprisingly, the report’s Overall Grade of 42.8 didn’t match the initial Overal Grade of 48.8, which was strange.

Research overall isn’t bad at TradeKing, but the individual stock reports were a little disappointing. They did, however, garner four stars for research in the latest Smart Money 2008 Best Online Brokers survey, likely on the strength of their other data. Comparatively, E*Trade offers (for Yahoo) analyst reports from Credit Suisse, Reuters, Standard & Poors, Rochdale Research, Sabrient, Thomson, as well as a Jaywalk Consensus Report (by BNY Jaywalk). TD Ameritrade offers reports from The Street, Standard & Poors, Ford Equity Research, Market Edge, and the Jaywalk Consensus Report. Both firms received five stars from Smart Money (and both charge more for trades).

Education

This is probably one of my favorite parts of the site and I devoured their Options Playbook chapters, authored by Brian “The Options Guy” Overby. I knew very little about options and this little “playbook” gave me enough information to be dangerous to my bank account. It went through all the terminology, all the plays, all the scenarios for all the plays (especially valuable), and was done in an entertaining (a lot of jokes, some of which were bad jokes) that made it fly by. You don’t need an account to view the Education Center.

Customer Service

Customer Service is very responsive, I was connected to a CSR via their online live chat in less than five seconds. I asked him a litany of general account related questions (I was trying to clarify the whole ACH hold issue I mentioned above) and he was very responsive and informed. If I run into any “real” customer service interactions, I’ll post them in the future.

One interesting tidbit I learned was that the ability to add multiple bank links was not a priority at this moment, which is understandable.

Fees

So, trading looks good, the community is young but growing, everything seems on the up and up with TradeKing… is there a catch? If there ever was a catch (can you tell I’ve been reading Gotcha Capitalism?), maybe it’s in the fees… but they’re not. $4.95 a trade, no minimum balance requirement, no account maintenance fee. Mutual funds trades are a little pricier at $14.95 a trade for no-load mutual funds but they beat a lot of their competitors (TDAmeritrade costs $49.99, E*Trade costs $19.99). If you are only going to get funds from one brokerage, say Vanguard or Fidelity, then I’d recommend opening accounts with them rather than buying through TradeKing; otherwise TradeKing looks good on the transaction fee category.

There are no fees for account inactivity and IRA maintenance ($50 for termination or transfer, which is standard). If you want paper statements, those will cost you $2.50 a piece and trade confirmations will cost $1.00. I recommend going paperless anyway (or just print up the documents yourself).

Conclusion

My experience with TradeKing so far has been good. There were a few small annoyances like waiting five days for the ACH link, then another five days on the first deposit, but overall it’s been a solid experience. The TradeKing “community” area looks nice but I don’t know how great that’s going to be considering they’ve had it open for a while and it still appears to be in its infant stages (or at least it’s only a toddler).

The one area I was quite impressed with was the educational areas where they taught you about options. Options can get tricky so explaining all the scenarios is certainly a plus and if you fancy yourself an options house, which I believe TradeKing does to a certain extent, you definitely need a place where you teach people how to do those types of transactions. While I won’t be entering into any Butterflies or Condors in the near future, at least I’ll know what the heck they are.

If you made it this far, thanks for reading, this is by far the longest and most comprehensive review of… anything, that I’ve ever done. Hopefully you found it valuable!

Last week I wrote about a little preview to the SmartMoney 2008 Broker Survey in which SmartMoney released some preliminary results from their annual ranking of brokerage firms. SmartMoney has published the full details of their report and I’m sad to say that TradeKing did not retain the top spot they enjoyed the last two years (third place isn’t bad!).

Summary

SmartMoney changed the way they listed their rankings a little this year. Last year, they separated “discount” and “premium” brokers. Compare the tables from 2007 versus the tables from 2008, they went from three (premium, full-service, discount) to one (umm… everything).

Of the 2008 top 5 (they were, in order, E*Trade, Fidelity, TradeKing, TDAmeritrade, Charles Schwab), only TradeKing came from the 2007 Discount Brokers bracket and they took the third spot (so one could argue they are still reigning champs of the Discount Broker conference?), the rest came from premium brokers.

The Winner: E*Trade

E*Trade snagged the top spot this year with nearly five stars across the board. They also shared a nod for the best trading tools with TD Ameritrade and topped the list for best banking services (sharing that one with no other brokerage). When you can offer an interest rate of 3.25% on your holdings and not require thousands and thousands in the bank, it’s no surprise they were given the nod there. I personally enjoy using E*Trade for my stock trading because of this convenient link between the bank and brokerage.

Incidentally, in 2003’s rankings, E*Trade scored 9th in the “basic discount broker” category because of their $22.99 a trade commissions. It’s amazing what five years and “listening to feedback” can do for you.

The Top 5

Looking strictly at stars, not much separated the top five. While the criteria were not equally weighted, each one scored five stars in at least two categories and a minimum of three stars in each (in fact, only TD Ameritrade had two three-star categories, every other broker had only one).
Here were the concerns (and my comments) about the top five:

1. E*Trade: None listed, they are so perfect.
2. Fidelity: Commissions were on the high side, at $10.95, I agree. Though I don’t really consider Fidelity a discount broker (in 2007, they were considered “premium”).
3. TradeKing: Weaker fund selection, though they were noted for low commissions ($4.95 a trade).
4. TD Ameritrade: No negatives listed, though they only gained three stars in banking services. Their interest rate on cash of 0.1% was the lowest of all the sixteen listed brokers by far (second lowest was #9 Scottrade at 0.5%)
5. Charles Schwab: Is Schwab really a discount broker? Commissions run $12.95 a pop, hardly “discount” prices, but they had only three-stars in customer service.

TradeKing: 2007’s #1 Discount Broker

They probably got hosed this year by the rejiggering of categories (they had to update their little award picture!) since they were the only one of the top five to have come from last year’s discount category. Of the top ten, they were the second cheapest to Interactive Brokers (a firm I hadn’t heard of before this year’s survey) by a significant margin (after TradeKing, second cheapest was Firstrade at $6.95, a 40% difference). TradeKing did score a ribbon for best customer service and were the only firm to earn five stars in that category.

Zecco: 14th of 16th - Ouch!

What about #14 Zecco with their free trades? (they get a lot of blog press) They scored very weakly across the board for each of the five categories (one star in Trading Tools, Research, and Customer Service) though they received special citation for the worst customer service of the bunch. The $0 per trade offer is a compelling offer but if you’re looking for some hand holding, you won’t get it. Tou get what you pay for ($0). If you only need a broker to enter your trade into the market, Zecco is a good deal; if you’ll ever need to talk to someone about anything… you might as well slide up the commission price chain and go with someone like #6 Firstrade ($6.95 a trade) or #3 TradeKing ($4.95 a trade). You shouldn’t be trading so much that much anyway (though Sharebuilder, the epitomy of buy and hold, took dead last).

There you have it, another year, another brokerage survey from SmartMoney. If you’re looking for a bank and brokerage in one, I personally recommend E*Trade because they make it easy to link up the two (open up one account and you can open the other within minutes online), which can be a good or a bad thing.

Source: SmartMoney’s Annual Broker Survey [SmartMoney]

If you visit the E*Trade homepage, you’ll see a big yellow star that names E*Trade the #1 premium broker of 2007 by Smart Money magazine and “Best of the Breed” in Money Magazine in August 2007. If you visit the Scottrade homepage, you see a blurb about a J.D. Power and Associates Award for “Highest in Investor Satisfaction with Online Services” award. And if you visit Zecco homepage, they don’t have any awards posted. Does that mean E*Trade is better than Scottrade and Scottrade is better than Zecco? Maybe, maybe not! So I wanted to match up all the awards and ratings and come up with my own ranking of the best online discount broker.

The List: I started with all the Premium and Discount brokers from Smart Money 2007 Brokerage Ratings page and then removed anyone with commissions greater than $10. That left me with E*Trade, Banc of America, TD Ameritrade, WellsTrade, Scottrade, Firstrade, WallStreet*E, SogoInvest, TradeKing and then I added Zecco, simply because they offer $0 trades, and Sharebuilder, because they offer a unique discount purchasing program. I removed Banc of America, WellsTrade, and TD Ameritrade because they’re affiliated with larger banks, I wanted standalone brokers.

Best Discount Broker: TradeKing

TradeKing is running a $50 promotion this month where you can get $50 for opening a new TradeKing account, depositing at least $2500, and making one trade.

TradeKing was named #1 Discount Broker by Smart Money magazine in 2006 and 2007. Barron’s gave it four stars in its rating system. At $4.95 a trade plus a very competitive money market sweep account and low options fees ($4.95 a trade and 65 cents a contract), there are good reasons to list TradeKing first. When it comes to discount brokers, TradeKing appears to be the one with both cheap prices and enough performance clout (see the awards) to give me confidence that the low prices don’t mean poor service.

E*Trade

E*Trade, one of the priciest of the online discount brokers, with a $9.99 trade commission, has won several awards in its own right. #1 premium broker of 2007 by Smart Money magazine and “Best of the Breed” in Money Magazine in August 2007. One startling ranking was one for Kiplinger’s in 2006, where E*Trade was rated 9th (the only other online discount broker on the list was Firstrade at #4 - #1 was optionsXpress but their trades cost $14.95).

Scottrade

Scottrade was rated the highest in investor satisfaction by JD Power & Associates and beat out all other comers on the list, including E*Trade and TD Ameritrade, which is amazing considering trades cost a mere $7. While the scoring for this was for satisfaction and not scope of offering (though it does include information resources and trade execution), which many other awards are based on, it still speaks volumes about the happiness of Scottrade customers.

SogoTrade

SogoTrade, once known as SogoInvest, is as bare bones as you can get, running the caboose of the discount broker train according to Smart Money magazine. To be honest, you can’t expect much at $3 a trade and you don’t get more than the ability to trade. I looked for awards but there were none to be found.

Zecco

If SogoInvest is the caboose, where does that leave Zecco and it’s zero cost commissions? Not a single award to go on, Zecco does offer ten free trades a month if you have a balance over $2,500 but they score last in customer service. While the free trades offer is nice, is it really worth that much? Hardcore traders complain that ten isn’t enough. Novice traders shouldn’t be trading ten times a month. With no name recognition and little to offer, I’d skip them.

Sharebuilder

Sharebuilder isn’t really a discount broker in the traditional sense because you pay $4 a trade but it has to be done on a schedule, meaning the following Tuesday. So in a sense you can buy stock at a cheap price but you have less control over it. Sharebuilder was recently acquired by ING Direct and they’re also, currently, the only broker to offer promotion codes for free money.

The Awards Sites

Below are links to the award pages I could find:

Update: Smart Money just released the results of their 2008 Brokerage Ratings.

Smart Money 2007 Brokerage Ratings - The rankings from 2007 listed TradeKing as the number one discount broker, their second in a row. The full ratings, in order from best to worst, were Scottrade, Firstrade, OptionsXpress, Muriel Siebert, WallStreet*E, SogoInvest.

2006 Kiplingers Ratings - For a $50,000 account, the rankings were: optionsXpress, Muriel Siebert, Wells Fargo, Firstrade, Fidelity, Vanguard, TradeKing, Schwab, E*Trade, Scottrade, and TD Ameritrade.

For JD Power & Associates, I invite you to search on their site.

A bank is a bank is a bank is a bank right? So, why are there so many banks in the United States? Well, there are plenty of reasons but one of which is that each and every bank out there solves one problem or another for those people who hold accounts there. In the next few hundred words I’ll tell you which types of bank accounts you’ll need and where to go look for that type of account. By types of account I don’t mean savings, checking, money market, brokerage, retirement, or whatever account - I mean the purpose of the account. Once you identify the purpose of the account, it’s far easier to pick the right bank for you.

Daily Access Account

The daily access account is an account that you want conveniently located such that it’s easy for you to get your money very quickly. With the proliferation of automated teller machines (ATMs), it’s often just as good to have access to your bank’s ATM and not an actual full service branch. For me, my daily access account is a savings and checking account at Bank of America. I’ve heard of some horror stories from Bank of America (then again I’ve heard horror stories from every bank) but when it comes to ATMs, I don’t think anyone has them beat. Everywhere I go I see a Bank of America ATM and anytime I’ve needed money, a BoA ATM was just around the corner. What you need is a bank just like that in the places you go.

One important consideration with your daily access account is whether there are fees. Usually you can avoid fees by keeping a balance above a certain amount or by setting up a direct deposit. Since your daily access account’s interest rate will probably suck big time, you will want to keep as little as possible. You also want to pay exactly $0 in fees so pick this account wisely.

High Yield Savings Account

Let’s face it, right now CDs and bonds just don’t cut it. Everywhere you turn is another online bank that is offering you over 4.00% APY on your savings. While I’d be wary of picking any hole in the wall, ING Direct and FNBO Direct have been doing the online thing for quite some time. Emigrant is also an online extension of their brick and mortar bank. Either way, your high yield savings account is where you will want to store the bulk of your regular savings. Emergency fund? Stick it in a high yield savings account.

One recommendation I have is that if you happen to be one of the lucky folks who has their Daily Access Account at Citibank, you’re in luck because they also have a high yield savings account that you can link directly to your regular Citibank account. Instead of waiting the 5-7 days to transfer funds from one bank to another, Citibank customers can do it instantaneously. If it were convenient I’d have a Citibank account.

International Account

If you do a lot of traveling, an international account is a must. I don’t know how many banks do this but one big one is HSBC. Many of my relatives hav HSBC accounts that they can get access to whenever they are in Taiwan and China or here in the good old US of A. From what I hear, the international account and the domestic account are held separately but you can transfer funds between the two relatively easily. Either way, I think that this is preferable to exchanging cash at the ripoff counter at the airport. (if you have a Capital One card, you can make international purchases without that pesky surcharge, Discover too but that’s less widely accepted)

Good Loan Terms Account

Nothing beats a credit union in this department. In fact, I’m a member of a credit union only because they generally have favorable loan terms! (I currently have exactly $6 in my account there) Credit unions are designed to work in favor of its members, so it will usually have the best loan terms compared to a commercial bank (they are designed to work in favor of its shareholders). Everyone can find a credit union they can join and everyone should join one because it will likely cost you nothing and you never know when you’ll need a loan.

Retirement Account

This can be at a bank or with a brokerage but having a retirement account is crucial. What you want to do is pick a bank or brokerage that has what you want with the lowest amount of fees. You want mutual funds? Life cycle / target retirement funds? Find the cheapest brokerage because those little percentage points are going to add up over the next few decades.

Brokerage Account

Everyone should have a brokerage account if they are saving their money and have more than they need in an emergency fund. This account can be tied into your retirement account but you will want one so you can start putting some of your hard earned money to work.

That’s it, those six bank account types cover essentially everything you need. (I hope! If I’m wrong or missed something, please let me know!)

This morning I did a bit of an apples to oranges comparison of a 401(k) and a high yield savings account, showing that the two would meet two years and two months out given a set of probably unreasonable assumptions. It was apples to oranges because the risk involved in investing in the stock market simply isn’t anywhere near the risk involved in saving money in a high yield savings account. So, I took Anne’s suggestion and compared a pre-tax account, in this case the 401(k) again, and a post-tax account.

Results? 401(k) never catches up. Despite starting with more money, $133 vs $100, 401(k) can never get over 25% the marginal tax rate + 10% penalty hit that it takes when you extract funds from it (not a loan, a straight up withdrawal). If you plan on pulling out your 401(k) funds to buy a house, don’t put them in there in the first place. Make the minimum contribution to get your match, then put the rest somewhere else.

Assumptions

• Better is defined as the approach that ends up with the most amount of gain.
• You are in the 25% marginal tax bracket.
• Both accounts return 11% a year, or 0.8735% each month, compounded monthly.
• There is no 401(k) contribution match by your employer. An employer match will bring in the breakeven point and raise the value of the 401(k).

Pretty Charts!

The chart below plots the growth of the brokerage account versus the 401(k) account. The value shown is the final extracted value, but growth is based on the non-extracted value. For example, with the 401(k), it’s the pre-tax dollar amount that is being compounded but the graph is showing that value reduced by 35% (25% tax, 10% penalty). The brokerage account line is growing based on its unrealized gains but the value shown is the realized gain, minus long term or short term capital gains. If you’ll notice the little hitch in the purple line at around month 12, that’s because the brokerage account tax rate fell from 25% (short term capital gains) to 15% (long term capital gains).

If you’re interested in the Excel spreadsheet I played with to reach these simplistic conclusions, I’ve made them available here. Please check it out and let me know if you see any mistakes I may have made.

E-Trade Financial took a huge hit to their stock price today (50% haircut!) on word that they will be taking huge write downs because of their investment in securities backed by home loans. In fact, a Citi Investment Research analyst covering E-Trade downgraded it to a “Sell” from a “Hold,” adding that there’s a 15% chance E-Trade would go bankrupt. So what happens and what can you do if your brokerage goes bankrupt?

First off, you only have any protection if your brokerage has SIPC insurance. SIPC stands for U.S. Securities Investor Protection Corporation and it’s a federally chartered private corporation insuring shareholders against a stock-broker going bankrupt. It’s similar (but not exactly like) to FDIC and NCUA insurance for deposit accounts but covers against bankruptcy and not issues like fraud. If your brokerage is a member of the National Association of Security Dealers (NASD) FINRA (Financial Industry Regulatory Authority), then you will have SIPC insurance because the FINRA requires it. I personally would never use a brokerage that wasn’t in the FINRA because there’s simply no reason for it. The SIPC will cover you for $100,000 cash and $500,000 total (stocks and bonds, not futures, options, currency, etc.) but the brokerage itself may have supplemental insurance that goes beyond that.

So, what do you do? If your brokerage is liquidated, the court-appointed trustee will send you a claim form to fill out and send back. The turn around time is estimated at one to three months according to the SIPC website and that’s if you qualify (most do, there are some exceptions on that) and do it within the deadlines. Lastly, make sure you have good records with your statements so you can get your stuff back in a timely fashion. It’s not unheard of for a brokerage to have bad records so having your own helps the process.

Now with ETrade specifically, they claim to have SIPC coverage and you can confirm this by searching for “E*TRADE Securities LLC” in the SIPC lookup database. The search is very fickle, you have to type the whole name or it won’t find it (Etrade, Etrade financial, etc. all give no result).

Unless I’m missing something, it sounds like those folks who have investments through ETrade are covered by the SIPC. Those investing in ETrade are a different matter… whew, 50% is hard to take.

I just received an email from Zecco about a change to their fee structure, effective 01 Jan 2008, and below is a comparison of the changes as I can tell.

*Minimum Balance: Under the new structure, you only get 10 free trades a month if you have a balance over $2,500. Those with balances under $2,500 will not get any free trades. So, while the account has no minimum balance, to qualify for ten free trades you must have more than $2,500 in that account.

Summary

This likely will have little effect on the majority of Zecco users as Zecco claims that 98% of their investors will not be affected, that is, 98% trade less than 10 times a month (good!). I bet you that they saw a large percentage of their costs being eaten up by day traders and so they decided to change the structure such that they can start charging those “power users” without upsetting the majority of their customers. This also allows them to add a number of features they’ve wanted to such as increasing the number of service representatives, adding 3 and 4 legged options strategies (butterflies, condors, etc.), releasing options analytics, and building up their ZeccoShare social network (all these were described in the email).

Nashawn recently asked on my post about opening a Roth IRA right this minute for some advice as to how she should invest $500 with a Roth IRA. She’s looked at Vanguard’s mutual fund accounts and ran into the minimum balance requirement for each of the funds. At Vanguard, the STAR Fund has the lowest minimum balance with $1,000 - a good $500 more than what Nashawn has at the moment. If I were her, this is what I’d do…

Wait Until April 15th Next Year
You have until tax day next year to contribute to your Roth IRA this year. That is, you have until April 15th, 2008 to contribute to your Roth IRA for 2007, giving our heroine a good nine months to try to get her balance up to $1,000. This is predicated on the fact that you are sold on Vanguard’s mutual fund accounts.

Consider Another Brokerage
You don’t have to go with Vanguard and you don’t even have to go with their mutual fund account, with a regular brokerage account your account balance minimums are lower than $3,000. TradeKing, Sharebuilder and Zecco are atypical brokerages that don’t have account minimums and both are known for their cheap/free trades. That’s crucial for a balance of $500. TradeKing has no custodial fee but Zecco charges $30/yr and Sharebuilder charges $25.

When it comes to the bigger brokerages, your pickings get slimmer. Fidelity will waive their minimum of $2,500 if you can commit to a $200/month contribution (Fidelity has no annual fee). If you can commit to that, you might as well wait a few months and go with Vanguard (if you wanted).

Summary: If you’re sold on Vanguard and can wait, wait; otherwise there are plenty of other options out there whether you want a discount brokerage like TradeKing or a more traditional name like Fidelity, just keep an eye out.

If you know of any brokerages with low account minimums and low annual fees for Roth IRAs, please share!