Trade Up

As smoke clears from your portfolio, how much blame for this year's carnage can you pin on your e-broker?

Be fair about it. No one twisted your arm to buy Pets.com or the latest hallelujah wireless service. But during the worst of the market downturn, did your e-broker help you or hold you back?

Last year, complaints to the Securities and Exchange Commission about Web brokers exploded to more than four times 1997 levels. No surprises there. Since 1995 when Internet trading was introduced, 7.8 million people have started trading online, generating 807,000 trade requests across the Internet every day.

With this kind of transaction volume, mistakes are inevitable. But the situation is even worse than it first appears. Flubbed trades, delayed orders, and dropped sales are only the obvious ways an e-broker costs you money. The Ziff Davis Smart Business Labs put the nine leading online brokerages to the test. Our results found dozens of ways you can get soaked by a bad firm—as well as how to pick the right one for your needs.

Although there are more than 200 online retail brokerages doing business today, many won't be around six months from now because their business models require a high volume of trades from each investor—or a constant influx of venture capital. Trading volume slumped some 30 to 35 percent during 2000, and the picture isn't exactly rosy for the remainder of 2001.

Many firms that don't get swallowed will perish. While the government ensures that you won't lose your investment on an e-broker that fails, your assets could be tied up for months.

Even if your broker is big and stable, you may get gouged for sitting on your cash rather than moving it around. For example, E*Trade charges $15 per quarter when you dip below $5,000 and make fewer than two trades over six months. TD Waterhouse imposes the same fee for fewer than four trades over 12 months. Fidelity's $15-per-quarter charge kicks in for idle accounts, although the fee doesn't apply to mutual funds. And Charles Schwab's $25-per-quarter fee for sub-$5,000 accounts also penalizes small-scale investors.

Adding insult to injury, not all e-brokers provide you with an incentive to stash cash in their coffers. Better shops—Fidelity, Schwab, and Merrill Lynch, among others—automatically sweep your dough into a money market fund, which at least yields an average 3.9 percent compounded rate at press time. Yet it's not uncommon for low-rent outfits to shell out 2 percent or less.

We'll Get Back to You

Frustrated yet? Now consider the typical wait for your e-broker's site to load—or accept trades. When a trade goes awry, do you enjoy navigating the voice menus on the support lines? An overwhelming majority of e-brokers seem to spend more money on splashy design than on infrastructure and support.

SEC investigations last year determined that nearly one-quarter of online brokers don't regularly test their systems for capacity. Only about one-third of all brokers duplicate their sites, which allows traffic to be rerouted to an alternate location if the main servers go down.

Consider an all-too-common scenario: Click-click, you order a trade. Hours, even days, go by, yet the trade hasn't gone through. Thinking that the system somehow dropped your order, you submit it again. Presto—you just bought or sold twice as much of an issue as you intended, and your e-broker collected twice the commission. A simple usability tweak such as an e-mail message or a warning screen could prevent duplicate orders, but few online brokerages bother with them.

If you tried to iron out the details of this duplicate trade via e-mail, you may have inadvertently broadcast all manner of private information about yourself. The SEC found that passwords, Social Security numbers, mothers' maiden names, and details about trades regularly float electronically between brokerages and clients without even basic encryption. Only about one-third of all e-brokers encrypt their e-mail. And only about one-fifth of online shops have policies about protecting client privacy in e-mail.

Getting Better

Needless to say, online investors are grumpy about this level of service. So is the SEC, which began issuing orders in July 2000 requiring e-brokers to issue monthly reports on how well they're executing trades. Web firms also must provide on request information about where a customer's order was routed so errors can be tracked.

Bigger brokerages are devoting ever greater resources to retaining customers. E*Trade, for example, significantly boosted outlays for customer service infrastructure last year. The result: The time clients spend on hold has been cut in half, according to company officials. The company also partnered with A.B. Watley, a New York firm that creates software platforms for active traders. And its E*Trade Bank division now sells everything from mortgages to CDs and insurance. (We'll cover online banks in next month's issue.)

Fidelity didn't begin as an online broker, as its representatives quickly point out. Yet some 87 percent of its commissionable trades now truck across the Web. And customer questions are more complex than ever. The firm now staffs its 24/7 support lines with 3,200 customer service representatives. Fidelity opened a fifth call center last year, and the company has expanded its Spartan service for sophisticated traders—its PowerStreet Pro feature makes it easier for active traders to make multiple trades and execute complex orders.

Not only has Charles Schwab invested heavily to beef up its call centers and support lines, but the company's CyberTrader division caters to frequent traders by offering rock-bottom prices ($9.95 per trade for a minimum of 100 trades per month). CyberTrader provides greater control over the way buy and sell orders are executed. And Schwab's Webshop seminars lend a helping hand to novice online traders.

TD Waterhouse has boosted its spending on infrastructure for customer support and has since opened seven new branches, with support lines open 24 hours a day.

Once you've decided to switch online brokers, what's next? As recently as five years ago most investors selected a house based on the cost of commissions, interest rates, and a casual laundry list of available services. But that was before their portfolios tanked.

Today e-brokers face a lot more scrutiny. At a minimum, you'll want to know something about your house's financial solvency, the reliability of its servers, the quality of its customer support services, its policies about privacy and security, and full disclosure about costs and surcharges—the details typically buried in the squint print on a backwater Web page.

This requires some homework. (For a checklist of what to ask before choosing an e-broker, visit smartbusinessmag .com.) But a site's usability also tells you worlds about the firm's commitment to customer service and its eagerness to keep you in its family. With the help of businesspeople who also use the Internet to make trades and research their investments, our labs put nine e-brokers to the test.

Best Bets

Schwab emerged the clear favorite. The site is easy to navigate, thanks to an eye-pleasing layout and clear menu choices. Charts appear when you need them and they're easy to grasp (though even more detail would be appreciated). Research tools are first rate. Trades are a snap to execute. And testers gave kudos to the site's How Do I help feature. But the site doesn't allow users to compare companies within an industry.

Fidelity placed a close second. Though the sheer volume of available information can seem overwhelming at first, the site is masterfully laid out. Both novice and day traders will appreciate the level of detail, and the help feature is excellent. But testers would have preferred a more complete toolbox for stock analysis.

E*Trade also gets high marks for its smart design. Its one-stop shopping for financial services is irresistibly convenient. Testers loved not having to retype ticker symbols when using the site's analysis tools. In fact, screening investments couldn't be easier. But the incessant pop-up come-ons slowed testers down and were a black mark for E*Trade in the end. Also, some pages take up several screens' worth of space—a case where fixed headers would be welcome.

TD Waterhouse puts trade prices front and center—just where you want them. You'll also find the company's financial products within a single mouse click. It's easy to research a stock and find your way around the site. On the other hand, only frequent traders will appreciate some of the more advanced features. And testers suggested in some cases that the site trim back the overabundance of information.

Not the Only Game

If you're less than thrilled with the commissions these established players charge, CSFBdirect and Quick & Reilly also scored well in our usability tests. CSFBdirect charges the same commission whether you trade by phone, wireless device, or Internet. The site is well organized and offers an abundance of research tools.

Some of these tools are best suited to very sophisticated traders, however. And the site suffered from occasional glitches: In a few instances, testers typed in one company symbol and a different company's information appeared.

Quick & Reilly is a cheap date for trades, and you get real-time quotes the moment you open an account. Testers especially liked the customizable charts. But beginners beware: The site is geared toward experienced investors.

Merrill Lynch puts your personal advisor within reach from its home page. Its ML Opinion section and research tools are first rate. But the site in general is too confusing.

National Discount Brokers errs in the opposite direction: Weak research tools and very little hard information hobble a fine, easy-to-navigate interface.

Datek Online's site is also extremely straightforward. Fledgling users had trouble following advanced investing terminology, but still liked Datek's customizable streamer. But it's little more than a speedy swap shop. You'll want to do company research somewhere else, but come to Datek for quick and cheap trades.

Get a Second Opinion

With more than 200 e-brokers butting heads on the Web, there's going to be a showdown. Before you switch brokerages, check the financial health and general quality of the firm. Start with these sites.

www.sipc.org The Securities Investor Protection Corp. maintains a membership file of all brokerages listed with the SEC. This organization's sole purpose is to protect investors from flimflam artists and fly-by-night brokerages. If commissions and fees seem too cheap to be true, they probably are. Make sure the e-broker offering them is in the membership section here. www.gomez.com Gomez's offices span the globe in every industry imaginable. A free gem at this site is the ranking of brokers according to customer confidence, which includes how long the shop has been in business and the number of states it's licensed in. www.cyberinvest.com A great way to compare brokerages on a feature-by-feature basis, CyberInvest.com also includes links to published performance reviews. But its listing includes only the top 20 Net brokers. www.nasd.com Get the skinny on your stockbroker. The National Association of Securities Dealers keeps employment and criminal records, as well as complaint logs, for close to 700,000 registered stockbrokers. If you've had problems with your broker, come here to file complaints online.

Lab Test Results: Top Online Brokers

Broker Pros Cons Verdict Charles Schwab (800) 225-8570 $29.95 for up to 1,000 shares; $9.95 for frequent traders Superb site design; first-rate charts; research information galore. Can't compare companies within an industry. The best e-broker in the business for usability and customer service. E*Trade (800) 387-2331 $14.95 for market orders; $19.95 for limit orders Excellent layout; one-stop financial services; vaults of information; affordable. Gnatlike ads hover in your face; long Web pages need fixed headers. It shames the high-dollar houses for features and information. Fidelity (800) 343-3548 $25 for up to 1,000 shares; as low as $14 for frequent traders Masterful site design—helpful and friendly throughout. Needs more extensive research tools. A full-service shop—and worth the premium. CSFBdirect (800) 825-5723 $20 for up to 1,000 shares Well organized and easy to navigate; fine set of research tools. Some site glitches; research tools need clarification. A bargain shop for simple buy-and-sell traders. Datek Online (800) 823-2835 $9.99 for up to 5,000 shares Ultra-affordable; straightforward interface; 60-second execution guarantee. For experienced investors only; no research tools available onsite. Sweet prices and fast trades—but not for the uninitiated. Merrill Lynch (877) 653-4732 $29.95 for market orders up to 1,000 shares First-rate research tools; human financial consultants on tap. Needlessly confusing site; too technical for beginners. An old-school trading house that's still working out its online kinks. National Discount Brokers (800) 888-3999 $14.75 for market orders; $19.75 for limit orders Savvy site design; excellent prices; easy to make trades. Skimpy research tools; ineffectual help tools. Fine for trading on the ticker, but do your research elsewhere. Quick & Reilly (800) 837-7220 $14.95 for market orders; $19.95 for limit orders Quick to navigate; clean interface; low commissions. Research tools too technical for the finance rookie. A clean site for experienced traders, but intimidating for newcomers. TD Waterhouse (800) 934-4448 $12 for market orders; $9.95 for frequent traders Easy to navigate, with comprehensive financial services; priced right. Must be a frequent trader to take advantage of some useful features. Only heavy traders will appreciate the information overload. RATINGS Excellent Good Fair Poor Unacceptable

Wireless Trading

You may love your e-broker and you may love your wireless device, but there's no guarantee that they'll work together.

E-brokers are eager for you to run up commissions by trading often and from anywhere possible—by computer, phone, pager, or dog-sled messenger. The list of brokerages offering wireless trading continues to grow. Is the convenience of trading on the fly worth switching houses?

Not yet. The technology suffers all the limitations that cellular phones in the early 1980s did: spotty coverage, incompatible networks, a limited number of devices, poor or nonexistent support, high costs, and security holes.

But things are getting better. The popularity of handheld PCs from Palm and Handspring has made these devices the reigning choices for brokerages. Dozens of houses now support them, including Fidelity, Schwab, CSFBdirect, E*Trade, and Prudential. Fidelity and Schwab also let you execute trades via an interactive pager (commonly known as the BlackBerry) from Research in Motion.

Web phones are another matter. Despite the WAP standard for displaying Web content on cellular phones, brokerages must tailor their sites for the varying screen sizes on many phone models. And even the most advanced wireless e-brokers typically support fewer than a half-dozen phones.

So what's your best bet for wireless trading? Program your Web phone to alert you to a price movement in a stock, then dial a human broker to place your trade.

E-Broker Checklist

Crucial questions to ask before you sign on.

E-brokerages can gouge you in dozens of ways. The most galling problems result from mistakes you make because the site is poorly set up. Good usability is key. But that's not all. Here are important considerations to probe before you do business with an online broker:

Many brokers charge different commissions for various types of orders—market order, limit order, stop limit order, and so on. Are these prices posted and easy to locate? Does the house pose any restrictions on the types of orders you can place? If so, does it make these restrictions clear? Does the broker guarantee execution time—for example, 60 seconds or less? If so, look at the details in the guarantee. The best houses extend this policy to order cancellations as well. Can you cancel a market order? Does the brokerage confirm with you when you've canceled an order? Are current bid/ask prices displayed prominently? What are the firm's policies for outages or server downtime? Are these posted on the site? Does the firm provide a complete explanation of margin accounts, your liability with them, margin requirements, and detailed information about margin calls? Does the brokerage notify you of a margin call before liquidating assets? What is the interest charged on margin? Does the firm use at least two ISPs in the event that one suffers downtime? Can you make trades by phone when Web servers are down? Does it provide written policies about protecting your privacy? Does the firm encrypt e-mail it sends to you? Are its encryption policies stated on the site?

Copyright © 2004 Ziff Davis Media Inc. All Rights Reserved. Originally appearing in Ziff Davis Smart Business.