Investing 
8
comments

SmartMoney’s 2008 Best Discount Brokers

It’s always fun to see discount broker rankings. 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!).

(Click to continue reading…)


 Personal Finance 
34
comments

Best Online Discount Brokers

Open a TradeKing account todayIf 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.

(Click to continue reading…)


 Banking 
2
comments

Six Bank Account Types & How To Analyze Them

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!)


 The Home 
15
comments

Saving For A House: 401(k) vs. Brokerage Account

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).

brokerage account vs 401k growth chart

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.


 Investing 
9
comments

What Happens If Your Brokerage Goes Bankrupt?

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.


 Investing 
5
comments

Zecco to Limit Free Trades in 2008

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.

Description Current Future (01/01/08)
Free Trades per Month 40 10
Min. Balance* $0 $2,500
$ Per Trade $3.50 $4.50

*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).


 Investing 
19
comments

Starting A Roth IRA With $500

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!


 Investing, Reviews 
2
comments

Opening A Zecco Free Stock Trading Account, Part 1

Update: Zecco came in dead last in customer service again in Smart Money’s annual survey, so I decided against funding my account. Zecco only offers 10 free trades a month, hardly a great offer versus a mere $4.95 per trade for TradeKing.

I guess it’s time for me to jump on the Zecco free stock trade bandwagon now that it’s been a few months since they launched and had some time to work out some kinks (like a streamlined application process).

Stopwatch in hand (not really), I think I opened an account in approximately ten minutes but you will need some form of government issued id (Driver’s license, Passport, or Military ID). There are four relatively quick pages. Just a few quick notes, with page 1, where you sign up to myZecco, don’t use a password you use anywhere else, I’ll explain later. Page 2 being the bulk of the application, asking for investing history, employer, affiliations, and income. Unfortunately, you will have to fill out the “annual income” and “income source” fields of the normally optional (elsewhere) Financial Information section, but you can leave the rest out.

Now I wait for my two emails:

You will be receiving two automatically generated emails. The first confirms that we have received your application and is generated immediately. The second is generated as soon as your account is approved and opened. Receipt of this second email may take a few minutes to a few business days.

Okay, never mind, I just checked my email about two minutes (no joke) after I applied and both emails are sitting in my inbox… guess the approval process is pretty quick.

Now, why shouldn’t you use a password you use anywhere else? Well, so far the only thing I haven’t liked about Zecco was how, after signing up for myZecco, they sent my password to me in plaintext in an email… seriously, don’t send the password out like that, you’re in the financial industry, you should know better. If you don’t know what I meant by plaintext, I meant it wasn’t encoded or encrypt or anything, anyone who picked up the packets in the middle would’ve known what my password was and that’s just plain stupid. So if you do signup, don’t use a password you use anywhere else.


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