The discount brokerage industry has come a long way since Charles Schwab launched his business in 1975. Today, many online discounters look more like the full-service brokerages they used to pooh-pooh. On top of the menagerie of investments available, you can go to some discount brokers for a credit card, a mortgage and other banking needs. More important, you can get nearly all the research information once available only from full-service brokers. Some discounters will even provide investment guidance.
This year, we reviewed ten firms. We analyzed each in six broad areas. First, the obvious: fees and commissions, range of investment options, research and tools that are accessible to all clients, and banking services. We also measured the so-called user experience — the ease of navigation and functionality of each Web site and app. Finally, we put the firms through a customer-service test to vet their representatives’ responses over the phone, through e-mail and via online chat.
No firm aced every category. That meant the final outcome depended to a large extent on how much we weighted the categories. We based our weightings on what our readers consider important: costs, 25%; investment choices and user experience, 20% each; research and tools, and customer service, 15% each; banking services, 5%. (For more on how we ranked our picks, see Best Online Brokers, 2012.) Ultimately, you should decide what you consider most important and choose a broker accordingly.
Slide through to see our rankings of the best online brokers.
Best Online Brokers for 2012
In a mild upset, E*Trade carried the day in this year’s rankings. It isn’t the lowest-cost firm — it charges you $9.99 per transaction — but its high scores in investment choices, user experience, and research and tools propelled it to the top of the list. According to the company, customers have access to more than 50,000 bond issues. Plus, E*Trade offers access to trading on 40 foreign exchanges from Austria to South Africa — more than the typical 20 or so at other online brokers. E*Trade also lets you trade 92 exchange-traded funds without paying a commission.
Nearly all firms let you customize your viewing experience, but E*Trade does a better job of it than most of the others. Just click, drag and drop, and you can see what you want to see on your online account summary page, where you want to see it — and that adds up to a great user experience.
As for customer service, E*Trade outdid the other online brokers with its speedy responses to e-mails and its (mostly) correct answers. The firm says it has been focusing on improving customer service, and it showed.1. E*Trade
When it comes to research and tools, Fidelity wins the race. The firm offers 36 savings, tax and retirement calculators. It also provides stock research from 12 firms, including Ned Davis and Ford Equity Research.
Fidelity's investment choices also scored well with us. It offers 31 no-fee ETFs, the third most of our picks, and 1,710 no-fee mutual funds, also ranking it third. Fidelity also reaped top marks for its banking services despite having no bank affiliation.
But fees were a downer. Fidelity charges customers a whopping $75 to buy shares in a mutual fund that is not included in the firms’ no-transaction-fee programs. To close a retirement account demands $50.
And then there’s its customer service: By phone, e-mail or chat, we got varying responses to a question about whether a Pimco bond fund carried a $75 fee to buy it (the fund is clearly marked on Fidelity’s Web site as a no-transaction-fee fund). The correct answer: There’s no charge to buy the Pimco fund, but you will get slapped with a $75 fee if you sell within 60 days of purchase.2. Fidelity
Scottrade scored well with us for its low fees and good banking services. The firm charges just $7 per transaction for stocks and ETFs and $17 for mutual funds outside of its no-transaction-fee program. It's also fee-friendly on banking services, offering no-fee checking and free ATM withdrawals. But Scottrade does charge an annoying fee here and there. For example, you'll be dinged $2 a month if you want to get a paper statement in the mail.
In customer service, Scottrade suffered a low score. We’re still waiting for a response to an e-mail inquiry we sent in July.3. Scottrade
When it comes to investment choices, the champ for ETFs is TD Ameritrade, which offers 101 ETFs without commission. It had the second-most offerings of no-load mutual funds with 1,881 choices. And TD Ameritrade matched Fidelity with stock research from 12 firms.
The downside: TD Ameritrade charges $9.99 per transaction.4. TD Ameritrade
It’s probably not a surprise that TradeStation ranks high overall in the category of investment choices. The firm was founded in 2001 by brothers who developed their own trading platform in the 1980s after they found others lacking. You have to download a software program to run it, but if access to bonds and options is your thing, this firm is for you.
TradeStation scored poorly when it came to its research and tools, as well as customer service. It does offer some tools, but it can’t compete with the sheer number of tools and information sources offered by the bigger firms. And for banking, we awarded the company no stars — it does not offer banking services at all.5. TradeStation
Firstrade scored highly on investment choices. It offers access to more than 6,000 mutual funds, but only 507 for no transaction fee.
Otherwise, this firm ranks in the middle of the pack. It provides some tools — including retirement-planning calculators and screeners for stocks, bonds, funds and options — but nowhere near the number of tools and information sources offered by the bigger firms. It also offers an iPhone app that lets you trade stocks and options but not bonds or funds.6. Firstrade
Schwab comes close to a perfect score in the banking category. You can pay bills and deposit checks through the firm’s phone app, but its iPad app doesn’t have the photo-deposit feature (Schwab says that it’s working on it).
For investment choices among no-fee mutual funds, Schwab stands the tallest. The firm offers 2,263 no-load funds without transaction fees, handily beating out second-place TD Ameritrade with 1,881 no-fee funds and third-place Fidelity with 1,710 no-fee funds.
Schwab lost points with us on customer service. The firm does not offer a chat feature and, worse, it failed to respond to an e-mail.7. Charles Schwab
"Google it." That's not what you want to hear when you call your broker for help. But that’s the response we got from a Merrill Edge customer-service rep when asked if a specific bond fund carried a front-end sales charge. It’s also the reason the firm landed at the bottom of the list in customer service.
Merrill Edge also fared poorly on investment choices. The firm’s range of offerings fell below average nearly across the board — from no-transaction-fee funds and no-commission ETFs to corporate bonds, foreign bonds and even IPOs.
And when it comes to costs, Merrill Edge punishes customers for moving money out: It will cost you $30 to wire money and $75 to move an IRA account. Although Merrill charges just $6.95 for stock trades, it costs $39.95 to buy funds outside of its no-transaction-fee network (the group average was $32) and $44.95 to execute a trade with a phone representative (group average, $27).
Merrill Edge did score perfect marks on user experience and banking. It helps to be tied to an actual bank — Merrill Edge is owned by Bank of America.8. Merrill Edge
Just2Trade has a snazzy Web site, with an up-to-date design and customizable click-and-drag windows. But the firm doesn’t have a smart-phone app. And its number of tools and amount of research information are limited.
To trade stocks, bonds and funds, Just2Trade is light on costs — it charges only $2.50 a transaction. But it slaps you with a $50 levy if you transfer your IRA to another firm. And it charges $35 a year merely to keep your IRA.
The firm's customer service also left something to be desired. One of its reps suggested we read the prospectus — not a bad idea on its own — to find out whether a fund levied a load.9. Just2Trade
ShareBuilder earned high marks for its user experience and banking services. It offers both bill payment and check deposit on its phone and tablet apps but doesn't reimburse fees incurred when you use an ATM outside its network, and that held the firm back in this category.
But the firm's investment choices, tools and research information were lacking. ShareBuilder also didn't offer a chat feature for customer service.10. ShareBuilder