Best of the Online Brokers

Fidelity, with a wide array of investment choices and a terrific Web site, takes top honors.

By Thomas M. Anderson, Associate Editor

From Kiplinger's Personal Finance magazine, November 2008

We quizzed all of the brokers' account representatives to test their knowledge. We asked whether we could use borrowed money in an IRA (you can't) and whether we could buy a closed-end fund at a discount (only if the fund is selling at a discount to net asset value), and we pressured the reps to give us advice on whether to buy shares of General Mills (they're not supposed to offer advice on a stock, but the good ones will steer you to their firm's research and tools). Only E*Trade and TD Ameritrade reps received full credit. We preferred the TD Ameritrade rep because she was friendly; E*Trade's person seemed bored. As with Scottrade, a Firstrade representative missed two questions, flunking the quiz.

But Firstrade was the speediest with e-mail. Someone replied to our missive in 3 minutes. Meanwhile, it took Schwab 9 hours and 30 minutes to answer our message. WellsTrade customers might want to try carrier pigeons to get a faster response: It took the firm 21 hours and 7 minutes to answer a simple account question by e-mail.

We liked how some brokers doted on us. A TD Ameritrade rep will call you to discuss account features and tools and answer questions shortly after you open an account. Someone from your nearby Scottrade branch will give you a ring after you become a new customer. And Schwab dispatched a "financial concierge" to help us when we opened an account, even with a bare-minimum balance.

We awarded extra points to brokers who steered clear of trouble. We totaled fines levied by regulators and arbitration awards to customers for each broker over the past year. Then we divided that sum by the average number of trades at each firm to avoid bias against the big guys. Scottrade and Firstrade were at the bottom of the questionable-behavior list.

Investment menu

You need an online broker for more than just trading U.S. stocks. That's why we looked at the range of mutual funds, bonds and foreign stocks each broker sells. We awarded points to brokers based on how many no-load funds they offer, how many of those no-loads are available without transaction fees and what tools they have to select the funds. The top three were no surprise. Schwab invented the fund supermarket; Fidelity has a comprehensive network of its own funds, plus others; and Siebert has a deal to distribute Fidelity funds (and offers funds from other families, too).

We evaluated the brokers' bond offerings on the basis of the size of their inventories, access to municipal bonds and corporate bonds sold at auction, and availability of bond tools.

Schwab, Fidelity and E*Trade have the most robust bond selection. In March, Fidelity expanded its offerings by 40% by entering into a partnership with TheMuniCenter, a broker that specializes in bonds. Fidelity has a selection of more than 40,000 IOUs. We also liked the tools, available at Fidelity, E*Trade and TD Ameritrade, that help investors build ladders of bonds that mature at different times.

Direct access to foreign stock exchanges is a nice perk. True, you can gain exposure to international markets through funds and overseas companies that trade in the U.S. But a passport to local exchanges expands your investment options. In this area, E*Trade, Fidelity and Schwab are head and shoulders above the crowd, with access to more than 40 foreign markets.

User-friendly sites

No online broker is worth its salt if the Web site doesn't work. In this category, we judged brokers on how they executed stock trades, how long it took to transfer money to the accounts, and the kinds of online-banking and tax services they offered. We also took Web-site design into account.

Funding an account can be bliss or hell, depending on the broker. We liked opening an account at Fidelity; it was ready to go on day one. Schwab, by contrast, took two weeks to put our money into the account. And it's a plus to work with a broker that lets you pay bills online and provides a debit card. OptionsXpress is the only broker we surveyed that doesn't do either.

Brokers should also lend a hand with your Schedule D at tax time. We wanted a broker that mails free statements showing the average cost basis of each stock or fund sold the previous year and that lets you transfer cost-basis information when you open an account. Zecco was notably deficient.

But most important in this category, the Web site should be easy to use. We rated brokers on how much effort it took to find ten types of valuable data, such as real-time quotes, contact information and past statements, with as few clicks as possible. Schwab and Fidelity shared the winner's circle. Zecco and WellsTrade were the worst of the laggards.

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