Market
Lull Leaves
Online Brokers Scrambling
By Andrew Leckey, editor
Successful Investing
Remember
all the concerns about the computer systems of online brokers
crashing from the onslaught of orders on busy market days?
Not to worry. The stock
market sell off has taken care of that.
Despite continued growth
in the number of online trading accounts to more than 20.5 million,
trading volume is down by more than 40 percent. Which has left
this once-booming industry up for grabs.
Beleaguered online
brokers, their coffers drained by expensive advertising and price
wars, are slashing staff, merging or being acquired during the
market lull. Squeezing their profits further are well-heeled
full-service brokers, whose own online services target selected
clients.
After actively trading
stocks online for four years, Jim Popp, a retired salesman in
Cincinnati, is one of millions of average Americans temporarily
in hiatus. He and wife Nancy, both in their mid-60s, continue
to monitor financial Web sites to research companies and also
watch financial cable television religiously. When their beloved
tech stocks revive, the Popps will again be trading online.
"The primary reason
we trade online is cost, because there's pretty good discount
compared to using a full-service broker," explained Popp.
"We do all of our trading by computer and have only used
the telephone once or twice, when the computer was down or we
were out of town and didn't have access to a computer."
Online brokers are
competing on more than price.
"Two years ago,
E-Trade was touting online brokerage services in high-profile
TV ads, but now its print ads talk about certificates of deposit
and banking services," pointed out Marc Beauchamp, executive
director of the North American Securities Administrators Association
(NASAA) in Washington, D.C. "Firms that survive must offer
good services and robust Web sites with a lot of useful information."
Newly expanded areas
include wireless communications that let investors use their
cell phones to access Web sites and make trades, as well as sophisticated
new Web site planning tools for asset allocation, he said. Because
firms such as Charles Schwab and Fidelity Investments always
emphasized financial planning, it's an easier transition than
for transaction-based firms such as E-Trade or Ameritrade.
"Find out what
each online broker is good at and try to match your needs with
the right one," advised Dan Burke, senior brokerage analyst
with the Gomez Inc. (www.Gomez.com) research firm in Waltham,
MA. "Also be sure to have a high-end Web browser on your
computer for security issues, protect your information."
Here are the latest
Gomez rankings on the best Internet brokers based one ease of
use, customer confidence, on-site resources, services and overall
cost: (1) Charles Schwab, (2) Fidelity Investments, (3) E-Trade,
(4) CSFBdirect, (5) TD Waterhouse, (6) National Discount Brokers,
(7) Merrill Lynch Direct, (8) Ameritrade, (9) Quick & Reilly,
(10) Scottrade, (11) American Express Brokerage, (12) WingspanBank.com,
(13) Datek, (14) My Discount Broker and (15) WellsFargo Online
Brokerage.
Strictly
in terms of overall cost, the leaders, as ranked by Gomez, are:
(1) Financial Café, (2) Scottrade, (3) Firstrade, (4)
Empire, (5) Ameritrade, (6) My Discount Broker, (7) Datek, (8)
Web Street Securities, (9) NetVest, (10) A.B. Watley, (11) National
Discount Brokers, (12) TD Waterhouse, (13) Stockwalk.com, (14)
Quick & Reilly and (15) Harris InvestorLine.
"If you're looking
at your ability to open up an account and get services that you
want in one spot for a reasonable price, you'll find commissions
very low these days," said John Markese, president of the
180,000-member American Association of Individual Investors,
based in Chicago. "Yet while online brokers with a full
line of mutual funds and other features may not be the cheapest,
what they offer may be more valuable to you than low commissions
alone."
Firms vary in required
minimums, trading hours, screening tools and whether many mutual
funds or other investments are offered. If you trade often and
get research elsewhere, go with a firm concentrating on well-executed,
inexpensive trades.
There are also direct-access
brokers for extremely active traders, offering up-to-the-second
quotes and connection to an electronic communications network
that finds the best price. For these, a high-speed connection
such as cable or DSL is required.
The NASAA (www.nasaa.org)
recommends these steps before investing:
- Receive full disclosure before opening the account about alternatives for buying and selling securities and how you can obtain account information if you can't access the firm's Web site.
- Understand that most likely you're not linked directly to the market, and that the click of your mouse doesn't instantly execute the trade. Determine whether you're receiving delayed or real-time stock quotes.
- Receive information to substantiate any advertised claims concerning the ease and speed of online trading.
- Before trading, learn about entering and canceling orders, as well as the risks of borrowing to buy stocks through margin accounts.
- Review the firm's privacy and site security policies and whether your name may be used for mailing lists or other promotional activities.
- Receive clear information about sales commissions and fees and the conditions that apply to advertised discounts.
- Contract your state securities agency to verify the registration/licensing status of the online brokerage firm.
Editor's Note: Andrew Leckey's column "Successful Investing" appears regularly in the print edition of the Bull & Bear Financial Report.
