Online Brokers GROW UP - comparisons - includes related article on rating brokers

Kiplinger's Personal Finance Magazine, Nov, 1999 by Steven T. Goldberg

Crashes still occur and phones don't always get answered, but as a rule customers get better service.

Hearing the buzz about online trading, Scott Soja, already an active trader, bought a computer two years ago to take advantage of the low commissions and speedy trading promised by the Internet. Boy, was he in for a surprise. Web-site crashes and unanswered telephones cost him thousands of dollars. "It was so frustrating I was ready to chuck my computer out the window and go back to calling my old broker," says Soja, 41, who lives in Valencia, Cal., and trades stocks and options for a living.

Just one example: An investment club made up of Soja and eight Santa Clarita sheriff's deputies bought options, betting American Express would rise in price the next day. The stock did, in fact, skyrocket. At one point, the options were up 200%, and the club decided to sell. But E*Trade's Web site crashed, and its phone number didn't answer for an hour. By then, the options had plummeted 75% from their original purchase price. The club's loss on that one trade: $1,000.

At wit's end, Soja sat down one day several months ago and called about ten online brokers. He decided to open accounts with those that answered their phones the most quickly. The winners were Dreyfus Brokerage and InvesTrade. Both serve him well, Soja reports. Perhaps even more noteworthy, Web Street Securities, which had given Soja fits, recently made dramatic improvements. "They aren't crashing anymore, and they answer their phones in a heartbeat," he says. Soja is something of an expert on online brokers. In all, he has accounts with six of them, and "they all get used," he says.

Soja's conclusion (and ours, too, after poking and prodding 21 online brokers): Some still have problems fulfilling the basics. At times, they can't seem to keep their Web sites open for trading or answer their phones. But in general, they're better than they were just months ago. "In the last few months, things have gotten a lot better," Soja says.

The online-brokerage industry is growing up. It's not yet mature--investors still have to deal with some outrageous treatment--but it's no longer in diapers. A sanguine Glenn Tongue, president of DLJdirect, asserts: "We're past adolescence."

So that you don't have to devote the better part of a day dialing online brokerages as Soja did, we did the work for you, calling 21 brokers six times each over the course of two trading days. When we got brokers on the phone, we asked questions intended to test their knowledge. We also examined numerous attributes, such as the quantity and quality of research and other financial resources provided to investors (see the table below).

Our top-rated, five-star brokers--Discover Brokerage and Mureil Siebert & Co.--finished in a dead heat. Both offer market orders (an order to buy or sell a stock as soon as possible, regardless of price) for a reasonable--though not rock-bottom--$14.95. Siebert charges the same price for a limit order (an order to buy or sell a stock only at a specific price or better), while Discover charges $5 more. Discover offers handy investment tools and a Web site that's easier to navigate than any other we've seen. Siebert boasts responsive brokers and good executions. You won't go wrong choosing either of these brokerages.

Next in line is Mr. Stock, a little-known firm whose knowledgeable brokers answer the phone quickly and provide good executions. Mr. Stock charges $14.95 for a market order and $19.95 for a limit order. Mydiscountbroker.com finished fourth in our survey, despite being virtually unknown to most investors. It offers $12 trades. Neither Mr. Stock nor Mydiscountbroker.com got five stars overall, however, because they fail to provide year-end cost-basis information to clients. Otherwise, Mr. Stock would have been our number-one broker and Mydiscountbroker .com would have been number two. Wall Street Access, which ranked fifth, charges $25 for stock trades.

But your best choice depends in large measure on what kind of investor you are. If you're a frequent online trader, you'll probably be happier with Suretrade or Datek Online, whose commissions are less than $10 per trade. If you want responsive, knowledgeable brokers and Web sites loaded with top-drawer research and financial calculators, you'll likely do best with Fidelity Brokerage or Charles Schwab (although their sites are a little difficult for newcomers to navigate). Both are tailor-made for onestop shoppers--investors who don't want to prowl the Internet in search of tools for stock and fund screening, financial planning, portfolio tracking and asset allocation.

WHAT DOES IT COST?

The Cheapest online broker, Brown & Co., a unit of Chase Manhattan, charges $5 for a market order. The most expensive, Schwab, charges $29.95. All things being equal, you'll want to use a lower-priced broker--although the cost differences are not nearly as great as they once were. Brown is a no-frills brokerage offering little research on its Web site. Some very active traders prefer Schwab. "They continue to be underpriced by other discount brokers, but their commitment to service has been proven," says Debra Kaplan, 39, a trader in Tucson, Ariz.