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

VS. Smart Money 2008 Best Discount Brokers

Smart Money’s best were:

1. E*Trade
2. Fidelity
3. TradeKing
4. TD Ameritrade
5. Charles Schwab

Looking solely at these two rankings, Fidelity did the best scoring a 1st and 2nd across the two lists. Charles Schwab, TradeKing, and E*trade also remained consistently in the Top 5. The only real difference is in the ranking of TD Ameritrade and Muriel Siebert, though that could be in how they factor in commissions. Kiplinger’s doesn’t seem to care as much at Muriel Siebert is almost 3x as expensive as TradeKing.

Many of the scores confirmed the results found in Smart Money’s ranking, such as TradeKing scoring 5 out of 5 in customer service (pretty impressive considering their low $4.95 a trade commission). Smart Money’s winner, E*Trade, took fifth place in the Kiplinger’s listing of the best discount brokers.

It’s not that surprising that Zecco was listed so far back, they seem to have a problem shedding the negative aspects of “discount,” unlike other brokers, and continue to rate pretty poorly against their peers. I was surprised to see Scottrade dead last considering they rated rated the highest in investor satisfaction by JD Power & Associates but I suppose you have take all rankings with a grain of salt.

If you don’t have a copy of the magazine, Cap has a full listing of the 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)

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]

Smart Money reviews brokers every single year and they recently just gave a preview to their results. Rather than give the straight ranking, they discussed some headline categories (Commissions & Fees, Research, Trading Tools) and then listed the best and worst from each category.

For best commissions and fees, they listed Interactive Brokers, a brokerage firm I hadn’t heard of but does charge pretty rock bottom fees (half a cent per share on equity trades). They also showed the spread was anywhere from $4.95 for TradeKing to $112.50 for Fidelity on broker-executed trades.

For research, my Roth IRA brokerage, TD Ameritrade, took the top honors with Zecco and SoGoTrade splitting the worst place ribbon. One interesting point made was that J.D. Power’s research showed that good research trumps trade execution and customer service with regards to overall satisfaction. I found that pretty surprising since there is a wealth of free investing information out there but trade execution and customer service is where the rubber actually meets the road. If they can’t execute your trade or if you can’t get on the phone with someone in a few minutes, that’d be a deal breaker for me.

Last but not least, E*Trade and TD Ameritrade snatched the number one and one-a spot for trading tools with Sharebuilder playing caboose. It’s not surprising because Sharebuilder isn’t for the typical trader, it’s for people looking for an easy way to reinvest their dividends back into equities. TradeKing’s social networking area got a shout out as did Zecco and WellsTrade, but that was because they offered less than half the thirteen tools their researchers were looking for. Thirteen tools? Wow.

Anyway, check out the preview, I’m eagerly anticipating their results and whether TradeKing will need to update their current banner and call it a three-peat.

SmartMoney’s 2008 Broker Survey

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.

Zecco offers 10 free trades a month. Buffets offer all you can eat, which means you can get as much as you want for no additional cost. Casinos offer you all sorts of free “comps” to get you to come back into their casino. All this stuff is free, but it doesn’t meant that you should take advantage of it!

With Zecco, free trades sound great in principle because free is always good but they’re actually bad for most of us. The prevailing attitude, to which I subscribe to, is that you should be buying and holding, not actively trading a lot. If you’re a day trader with your finger on the pulse on the market, perhaps free trades is right for you. However, if you’re a “check your stocks at work for a few minutes each day” type of person, then ten trades a month is too much and feeling compelled to use them is dangerous. Buying and holding is preferable because you let time smooth out the volatility in the market, you let time lower your tax liability, and you let time temper your emotions so you don’t make rash decisions. Free trades are great, as long as you don’t feel compelled to use them.

How about buffets and their great all you can eat nature? For a while I would feel stuffed after going to buffets because I felt compelled to “eat my money’s worth” and eat as much as I could. If I paid one flat price and could eat as much as I could, I would try to eat as much as I could! Except that’s horrible! I’d feel bloated, then tired, then lazy the rest of the day… all because I felt compelled to take advantage of the free offer. Buffets are great, as long as you don’t feel compelled to actually eat all you can eat.

Lastly, casinos give you complimentary items just to get you to come back. They’ve done they math, they realize that every person they get into the casino will earn them a certain number of dollars. If they can get you back for the cost of a breakfast, that’s a win-win for both sides. You get the breakfast, they get the business, everyone wins… except for you because you probably will lose more than the cost of the breakfast right? So, comps are great, as long as you recognize what they’re trying to do (I can’t possibly say, don’t gamble because that’s how you got the comps in the first place!)

So… next time you see something advertised as FREE, think about it for a second. It might be no cost financially at the moment, but is it really the right decision?

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!

Last week I asked whether investment newsletters were worth it (the jury is still out), but when I talked to some people about it yesterday (the same co-worker), I had a revelation. When you sign up for an investment newsletter, what you’re actually doing is outsourcing the job of manager for your personal retirement or investment fund.

If it’s only $199 for the subscription to the Motley Fool’s Hidden Gem newsletter and you’re planning on putting $10,000 into it, you’re looking at an actively managed fund with a minimum expense ratio of 1.99%. Once you start adding in your own trading expenses, that numbers gets bigger, but essentially that’s your expense ratio (especially if you start trading with Zecco, thus taking out the buying and selling fees) if you want to compare it to some actively managed funds.

While it won’t compare to the low low expense ratios of an index fund but remember that you’re not really comparing your newsletter fund with an index fund, you’re (well, the newsletter is) actively managing its holdings.

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.