SmartMoney's Annual Broker Survey 2012 - SmartMoney.com

Most people seldom hear from their broker; they may get an occasional e-mail here, a letter there, and perhaps the rare phone call. But these days, brokers are doing a new kind of outreach: text messaging, often with a little nudge to trade. And that's just the tip of the tech iceberg. Some entice clients to download a mobile app that lets the client photograph a product's bar code to find the maker's ticker symbol. Then there are the less-subtle hints from services like Zecco's Zap Trade. When a customer browses certain websites and scrolls over the name of a publicly traded firm, Zap Trade slaps a big Z next to the name, and the customer can trade the stock right then and there. "We reach out and grab them by the lapel," says Michael Raneri, chief executive officer of Zecco Holdings.

2012 Broker Rankings

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Methodology

To rate the strengths and weaknesses of the discount brokers, we looked at a wide range of factors. Among other things, we examined the range of investment products and research tools they offer, consulted experts who study important factors like the speed and reliability of their websites, and conducted our own tests on the responsiveness of their customer service. We used a curve system to determine star rankings for six categories of fees and services. To obtain overall rankings, we gave different weight to those categories, putting a special emphasis on customer service and fees.

Grabbing, shaking and nudging (not to mention poking and tweeting) investors, brokers are going to the mat to entice their clients to act less like nervous Main Street investors and more like confident pros. In the past year alone, firms have unleashed a slew of mobile trading applications, social media tools, investing videos and seminars -- many designed to be as unintimidating as a quick round of Angry Birds. (Snapstock, that bar code photo app, was devised by TD Ameritrade to encourage female customers to turn shopping sprees into investment ideas, the brokerage says.) The ubiquity of sophisticated smartphones and tablets has fueled the tech proliferation, of course. But Isabella Fonseca, research director for wealth management at Celent, a consulting firm focusing on technology and finance, says all that gear is aimed at one goal: "Getting customers to trade more."

Indeed, if brokerage firms are grabbing customers more often, experts say, that's because it's one of the few ways to shake any money out of them. After years of duking it out on pricing, discount brokers can't lower commissions much further and still earn a profit. (The average price for a basic stock trade among discounters we surveyed this year is $7.96, down from $8.27 last year.) Meanwhile, sluggish stock activity is squeezing an industry that relies heavily on trading volume for revenue. In the new tech boom, at least some brokers see a chance to turn that around, says David Lo, director of investment services at J.D. Power and Associates.

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Not content with cajoling their own customers, firms are also wooing high-volume traders away from other brokerages. Several have launched sites aimed at "active traders," generally defined as customers who place 10 or more trades a month. And many have started emphasizing more-exotic investments -- including options, futures and currency trading -- that yield higher commissions. Charles Schwab, for example, courted both the active and the exotic last year by buying tech-proficient specialty broker OptionsXpress.

In all these arenas, technology is key to the courtship. A year ago, many of the firms didn't yet have apps for smartphones or tablet devices like the iPad. Now, almost all do. All this easy account access isn't necessarily a good thing; critics point out that trading more can mean running up extra costs -- and extra risk, as investors try to time the market. But the strategy is clearly achieving its goal of priming customers' trigger fingers. During a pilot program for Zecco's new iPhone trading app in January, the already active customers who were selected to get a first crack increased their trading activity by 10 percent.

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Of course, many self-directed investors want more from their brokers than just the ability to trade whenever and wherever they like. That's where our annual survey of brokers comes in. Along with tech, we look at service, which is still a high priority -- customers not only want quick access to advice and help over the phone but also lightning-fast responses to e-mails and instant messages. (Surprisingly, many big brokers still do poorly on this front, as we discovered with our own battery of customer-service tests.) But even the cheaper brokers are learning that if they bump up the convenience factor, customers will come -- and, in some cases, even trust the firms with their banking business. Time-pressed consumers increasingly expect their brokers to be able to respond instantly, says Lo. "God forbid something goes wrong with a trade." For our annual broker survey, SmartMoney took a close look at which firms did and did not live up to such expectations.

Commissions and Fees Best: Scottrade Worst: WellsTrade

When SmartMoney did its first discount-broker survey in 1994, the average commission for a stock trade at a discount broker was $28. Today, it's less than $8. Brokers are still competing for customers by cutting prices -- this year's average is about 4 percent lower than last year's. But it hasn't been great for their bottom lines: The nation's brokers earned $14.3 billion from stock-trading commissions in 2010 (the most recent year available), down 8 percent from the previous year and more than 30 percent from their peak in 2002. And market research firm Ibis World estimates that commissions, as a percentage of brokers' revenue, will keep sinking for the next five years.

The result, industry consultants say, is that the deals brokers giveth with one hand, they often taketh away with the other. Fees for other services and administrative work unrelated to trading have become a more important source of revenue -- and consumers, not surprisingly, are befuddled: In a J.D. Power survey in 2011, only 36 percent of customers said they completely understood their brokerage's commission structure, down from 52 percent the year before. Count Jeff Fleishhacker among the confused. Fleishhacker, an IT manager at a nonprofit in Brooklyn, N.Y., signed up for a Merrill Edge account last fall; because of the amount he had in his Bank of America account, he thought he was eligible for a fee-free trading deal. (Merrill Edge was created after Bank of America acquired Merrill Lynch, in 2009.) But just as he was about to trade, Merrill Edge's website said he was going to get charged a commission. He called customer service in confusion. Only then, he says, did he learn the money in his bank account didn't count toward the minimum needed to get free trading. "It seemed like a joke," he says. Merrill Edge says that it is revising its eligibility rules to make it easier for some customers to get the freebie trades.

Ask a broker for anything other than basic stock transactions, industry observers say, and the fees can quickly mount up. If you want to buy a mutual fund over the phone with E-Trade, you'll pay as much as $65 per transaction. The firm sets the fee high deliberately, as a deterrent, says E-Trade Securities President Michael Curcio: "It's so easy to go online -- there's no reason to go to the phone." And WellsTrade, the online discount-brokerage arm of Wells Fargo, charges $95 to close a retirement account -- a fee the company says is on par with its full-service brokerage. Scottrade trumps the other brokers in this category by leaving many of these fees out of its equation and keeping things simple. The brokerage charges $7 for a basic stock trade, and its commission structure is bracingly clear and easy to understand. TradeKing and Zecco each charge less for a stock transaction: $4.95 a trade. But both also charge administrative fees that Scottrade avoids, such as TradeKing's $50 account inactivity fee and Zecco's $30 annual maintenance fee for retirement accounts. (TradeKing says the fees help subsidize its customer service; Zecco says it needs to charge such fees to keep its trading commissions low.)

Customer Service Best: TradeKing Worst: WellsTrade

The market has been doing better of late, and by at least one measure, the love-hate relationship between customers and their brokerage firms has also improved. The number of arbitration cases filed against brokers so far this year is down 12 percent from 2011, according to the Financial Industry Regulatory Authority, the industry's self-financed regulatory body. Part of this d tente, experts say, is attributable to a sense of relative calm -- during the financial crisis, customers and brokerages alike were in panic mode, and the number of investor complaints was almost twice as high as today's.

But brokers say they're also pushing to improve the relationship by being more accessible. Increasingly, that means offering a growing number of digital options, from online chats to responses to customer tweets. All of the brokers in our survey except for WellsTrade now offer online chat (the brokerage says it's studying whether to offer the feature). On E-Trade, customers can chat 24-7 -- presumably handy for investors who are up in the middle of the night playing the Nikkei.

The discount brokerages prefer this form of contact because it is much cheaper than staffing call centers, says Lo of J.D. Power. Still, the digital communication is hardly seamless. Three of the 10 brokerages in our survey failed to respond to one or more of the test e-mails we sent to their customer-service departments. On the other hand, E-Trade responded almost overzealously: When we sent an e-mail through the public website inquiring about opening an account, we were required to give a phone number, and the company called us back four times before giving up. David Poole, the broker's vice president of customer service, says that some queries that come in by e-mail "are more involved, and a phone call is more appropriate." It's a valid point: For any serious problem, of course, investors generally say they'd rather talk on the phone. So it was disappointing that our tests indicated that phone service has slacked off a bit. In past years, the best-performing brokers answered our calls before reaching the one-minute-on-hold threshold; this year, none did.

Customers won't mind the hold times, experts say, as long as the advice is helpful. TradeKing, our category winner, does a lot of communicating via social media and responded the fastest to our test e-mails. But Doug Sarbon, an Atlanta audio engineer, has been relying on its phone service. Sarbon began calling TradeKing's customer-service line almost daily back in 2009, when he first started trading options, sometimes talking to the representatives for a half hour at a time. After the market closed on the day of the flash crash in 2010, he called the help line just to have a "What the hell was that?" chat with a friendly rep. He is sometimes put on hold for a while, he acknowledges, but he has been entertained by the money-themed hold music -- especially Kenny Rogers's "The Gambler."

Research Best: Fidelity Worst: WellsTrade

Ten years ago, the question "How good is your broker's research?" could translate roughly to "How many stock report PDFs will your broker let you download?" Today these research offerings are simultaneously more detailed and more casual. Fonseca, the research director at Celent, says educational offerings such as video libraries, webinars and client discussion forums have grown, in part, because they attract active traders or persuade other customers to trade more often. Social-media forums, for example, where investors trade ideas with each other, can drive up trading volume; they're a "good, inexpensive marketing tool," Fonseca says.

Indeed, research tools have become so important that most of the brokers we reviewed are pretty evenly matched. Corporate Insight, a financial-services research firm that studies brokers' market commentary, news alerts and fund reports, gave top marks to four of the 10 firms we studied. Fidelity Investments, the winner in this category, gets a slight edge because it has been particularly aggressive about relaying research via Twitter and Facebook. The brokerage has been moving many of the trading tools and research features from its Active Trader Pro platform -- including sophisticated charts and complex options alike -- to the standard site most of its customers use. James Burton, president of Fidelity's retail brokerage, says the firm is "democratizing" those tools. On the other hand, WellsTrade lacks a few of what have become online broker basics: Features such as an asset-allocation tool and presence on Twitter and Facebook, the firm says, are all "on our road map" but won't be available until at least next year.

Trading Tools Best: Fidelity Worst: WellsTrade

Kirk Duplessis, a 28-year-old consultant in Leesburg, Va., says he supplements his income by trading briskly on the options market. And while Duplessis, a former investment banker, is pretty sophisticated about the market, he does most of his trading on Thinkorswim, a website that's at least theoretically open to any Joe Blow. This online options platform from TD Ameritrade lets him open multiple windows and see his account balance, trading page and charts, all on the same screen. Compared with what other Web-based trading platforms offered when he first started trading stocks -- and even with what many are offering now -- he says, "it's a different beast altogether."

In a world where more Main Street investors are comfortable trading at 3 a.m. ("We call it bedside trading," says a TD Ameritrade executive), trading tools have quickly evolved. More than 75 percent of all discount brokerages have iPhone apps now, while more than half have apps for Android phones. Brokers are convinced that it's having the desired effect: Among the top 100 financial executives surveyed by Corporate Insight, 68 percent reported that their mobile applications are having a positive impact on their businesses.

Fidelity wins this category, with E-Trade and TD Ameritrade close behind. All three offer after-market trading, streaming quotes and options trading via mobile phones. Of course, the most important part of the online brokerage experience is placing a trade. In our survey, which used data from independent website tester Gomez, Fidelity was the fastest brokerage at trade execution, clocking in at less than four seconds per trade. The two slowest brokers of the bunch -- WellsTrade (14.5 seconds) and Merrill Edge (16 seconds) -- took almost twice as long as the industry average. Merrill Edge says some recent technical upgrades are improving trading speed; Wells Fargo says security measures might add extra seconds to its trading time.

Mutual Funds and Investments Best: Fidelity Worst: ShareBuilder

One of the longest-lasting divides in the brokerage world is between the all-you-can-eat buffet brokers and the stripped-down fast-food firms. The ones in the former category -- think Fidelity, Charles Schwab and TD Ameritrade -- have tried to offer just about every investment option a customer can think of, from gazillions of mutual funds to more-exotic fare, including futures, foreign-exchange trades and options. Of course, brokers who provide these aren't just being altruistic; the more-exotic investments tend to mean higher fees and bigger profit margins. For example, the average option trade at the brokerages in our survey costs $25, more than three times as much as a stock trade. About 16 percent of online customers now trade options, according to J.D. Power, and brokerages' commissions from options trading are up more than 70 percent since 2005.

A lot of the more esoteric investments are also popular with active traders, who tend to be more lucrative customers. In fact, some investment products are available only to customers who are big revenue generators across the board. Fidelity, however, offers a stunningly wide range of investing options to most of its customers, and it's the reason why it won this category. For example, all of Fidelity's retail-brokerage clients can now register online to trade directly in foreign markets.

Some brokers prefer to stick with meat and potatoes. ShareBuilder, which focuses almost exclusively on stocks, mutual funds and exchange-traded funds, finished last in this category. Dan Greenshields, ShareBuilder's president, says the firm's average customer age is under 40. This means the broker doesn't get a lot of requests for, say, Treasurys. "We'll probably offer bonds 30 years from now," when customers near retirement, he says.

Banking Best: Merrill Edge, Fidelity (Tie) Worst: Zecco

A few months ago, Fidelity threw its marketing muscle behind a new product rollout, announcing the debut with breathless press releases and even a live Twitter broadcast. Was all the hype about investing? Far from it: The new product was an iPad app that lets customers take photos of checks, so they can deposit them into their Fidelity accounts. And while Fidelity was the first broker to get the feature on an iPad, that firm and many of its competitors already had photo deposits for smartphones. (Charles Schwab says it now gets half of its customer deposits via digital picture.)

The tech ramp-up may be new, but the broker-in-bank's-clothing phenomenon has been around for a while: Most of the brokers in our survey now offer credit cards, debit cards and online bill pay that are tied to brokerage-linked bank accounts. Sophie Schmitt, an analyst at the financial-services firm Aite Group, says brokers make little to no profit from these services, but they're still a major part of their marketing strategy. "It's done mostly for 'stickiness' and customer loyalty," she explains. And because the brokers don't have some of the overhead of traditional banks, like branch offices or networks of ATMs, analysts say, some of them are providing some mildly attractive perks, like higher interest rates on savings accounts -- or refunds on the ATM fees charged by "real" banks. Some brokerages offer these perks only to their active traders or people with large account balances, but the three that finished at or near the top for us -- Fidelity, Merrill Edge and Schwab -- offer good deals to smaller account holders. The smaller brokerages in our survey, on the other hand, have very little in the way of banking amenities -- no credit cards, no ATM-fee reimbursements. (Raneri, the CEO of last-place broker Zecco, says such services don't fit with its focus on active traders.)