When I first started investing, I put a lot of stock into these broker rankings because I didn’t have any of my own experiences to draw upon. I didn’t know how I would use a broker, what features were important to me, and whether or not a deficiency really matter. Price was the number one factor, as is the case for a lot of investors.

Then, as I started to invest more and more, I realized that price wasn’t everything because I didn’t make a lot of trades. While it seems silly to pay $20 a trade when there are brokers offering trades for less than $5, it may make sense if the broker offers other features that you value. Nowadays, the differences in prices is much lower anyway and so the “other” factors, like customer service, fund offerings, and banking services become more important to me.

You have to review these rankings through your own rubric. There isn’t really a #1 broker for everyone, but there will be a #1 for you.

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Every year Kiplinger’s magazine puts out a survey of the best online brokers. Every year, I take a look at the list because I’m curious how the different brokers stack up. I’d like to know if anyone has made any big changes or improvements to their service, it might change my mind about who I do business with.

Usually the lists don’t change all that much. As you scan this year’s list, you’ll see the same ones near the top, the same ones near the middle, and the same ones near the end. The meat is in the article detailing the different categories (like commissions and fees, investment choices, etc.) because it adds a little color to an otherwise robotic list.

One important thing to remember as you peruse this list: the best online broker is the broker that satisfies all of your requirements. All the bells and whistles in the world don’t matter if they don’t offer exactly what you need. With so many brokers, many of which are inexpensive, you should be able to find your best broker, online or offline, if you’re diligent.

Let’s get to the list…

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Every year, Smart Money takes an in-depth look at online brokers, from their trading platform to their customer service, and rates them based on their performance. They open up accounts and make trades, they call up customer service and pore through the reviews, and they share all of their experiences with you – the good, the bad, and the ugly.

One thing that does surprise me is how little the list changes each year. For yet another year, the top five are the same, though their order has changed a little, and the back of the list sees the same faces. You would think that these brokers would look at these problem spots and at least make some steps to address them.
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I’m not sure how much it costs to execute a stock trade but it doesn’t appear to be all that much. When I first opened up my first brokerage account, it was with Vanguard. Vanguard has two main types of investor accounts, one where you invest in their family of mutual funds and one where you can invest in stocks, bonds, ETFs, etc. When I opened up my Roth IRA as a teenager, I did it with Vanguard and paid a then staggering $20 a trade. Twenty bucks! Nowadays, you can buy and sell a stock twice with TradeKing and still have twenty cents left over to get some Bazooka Bubble Gum. That’s a cheap stock trade right there.

So what defines cheap? Ultimately it comes down the dollar amount because you’d have a difficult time arguing that $12.99 is cheaper than $4.95. However, I think that just looking at the cost of the stock trade may be a mistake. Certain brokers charge you less but they offer you less in terms of tools, service, or both. Sometimes you have to review all the factors to make your decision.

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For years, I’ve heard good things about Scottrade (mostly from people defending Scottrade in this guest post) but never tried them. I mostly use E*Trade because of their high yield savings account and TradeKing because of their low commissions. Since I don’t have that much to invest, it doesn’t really benefit me to open up all these broker accounts just to put a few dollars here or there.

However, since Scottrade doesn’t have any account maintenance fees and a low minimum ($500), I thought I’d give them a look to see what the fuss was about.

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My wife’s Roth IRA currently sits at a TD Ameritrade account, where it’s been sitting for the last three or four years. With the majority of it in cash, mostly because we lost track of the account, we want to invest it in our retirement investment of choice, an index fund. Our index fund of choice happens to be the Vanguard 500 Index Fund because most of our retirement funds are with Vanguard. Vanguard does not have the cheapest index fund, I believe that title now resides with Fidelity’s Spartan 500 index. Paying the extra 0.08% seems reasonable considering we can manage it all in one place.

The only downside about this entire process is that TD Ameritrade has a $75 outbound full account transfer fee. Fortunately Vanguard does not charge you to transfer in an IRA (to my knowledge, no one does).

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In the latest issue of Kiplinger’s Personal Finance, they rated a dozen discount brokers on a variety of factors including commission, research & tools, fees, investment options, “easy of use,” and customer service. The results were pretty close to the results of Smart Money’s 2008 ranking of the best discount brokers.

Kiplinger’s Best Discount Brokers

1. Fidelity
2. Charles Schwab
3. Muriel Siebert
4. TradeKing
5. E*Trade
6. OptionsHouse
7. TD Ameritrade
8. WellsTrade
9. Firstrade
10. OptionsXpress
11. Zecco
12. Scottrade

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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.

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