Best Online Brokers

Kiplinger's Personal Finance Magazine, Oct, 2001 by Brian P. Knestout, Erin Burt

Investors need not worry much about site reliability. Keynote Systems, a firm that monitors Internet-site performance, uses high-speed Internet equipment to log on to each online-broker site automatically, testing each site's connections and speed of access. Keynote simulates every step of the transaction process but the final one of placing a trade. The average time to work through these steps has dropped since last year. It now takes only about ten seconds, versus 14 seconds then. Connections are slightly better as well: Keynote's tests reach successful conclusions nearly 98% of the time, versus 96% last year.

Our rankings of Web sites were somewhat subjective. We surfed each of them for hours and gave extra credit to sites that were easy to navigate. We judged the quantity and quality of financial tools and information to be of equal importance. Our judgments counted for three-fourths of each brokerage's Web-site ranking, while Keynote's results counted for the rest.

Rapped knuckles

GETTING STIFFED because of a mistake or (worse yet) malfeasance on the part of your broker is something no investor should have to endure. A crucial element of our survey was broker conduct. We calculated all the fines charged against a brokerage over the past three years by the NASD, stock exchanges and state regulators. To those figures we added all the arbitration awards against each firm. To see how that broke down among brokers of different sizes, we divided each of those totals by the average daily total of trades completed by each firm. American Express, E*Trade, Merrill Lynch and Morgan Stanley would not disclose their average trade totals, giving them bottom scores.

Brown had the best record, with only 42 cents a trade in total fines and arbitration awards. Scottrade was close behind, with only 47 cents; CSFBdirect tallied $1.30. Quick & Reilly and Schwab were hurt in our conduct rankings by one or two very big judgments that tilted the scales against them.

Other services

FOR THOSE investors who borrow money from their brokers, we priced loans of $25,000 and $50,000 and averaged the interest rates. Brown had the cheapest average margin rate, at 6.13%, followed by Siebert & Co. (6.5%), Scottrade (6.63%), TD Waterhouse (6.75%) and Fidelity (6.8%). The priciest was Merrill Lynch, which charged 8.88%.

As for options and bond trading, American Express is the only broker that doesn't offer some level of options trading. CSFBdirect, E*Trade, Schwab, Scottrade and TD Waterhouse allow municipal-bond trading, while Fidelity and Merrill Lynch will let you buy--but not sell--muni bonds online. Only CSFBdirect, E*Trade, Schwab, Scottrade and TD Waterhouse allow investors to trade corporate bonds online.

Kiplinger.com

Which broker is best for you? Go online to rank the 15 brokers by overall score or by any of the categories included in the survey.

RELATED ARTICLE: Measuring the online brokers

Snapshot, category rankings and overall scores

We ranked the online brokers on nine criteria. For each one a broker could receive from one to five stars (five stars being the highest score possible). To determine the overall rankings, we assigned one point per star and added together each broker's score across all criteria. We gave double weight to the most important criteria--commissions, mutual funds, responsiveness and knowledge, and cost-basis --and we half-weighted the score on margin rates.