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JUNE 2012

OURANNUALSURVEY

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Article copyright 2012 by SmartMoney. Reprinted from the June issue with permission from SmartMoney. The statements and opinions expressed in this article are those of the author.

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OST 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 sym- bol. 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. 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 technolo- gy 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. 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

SMARTMONEY

2012ANNUALBROKERSURVEYCOMMISSIONSAND FEES

THEBEST&WORST

CUSTOMERSERVICE

RESEARCH

TRADINGTOOLS

MUTUALFUNDS AND

INVESTMENTS

BANKING

Illustration by Ryan Etter for SmartMoney

$4.95Price of a stock trade onZecco andTradeKing—but both charge steepfees for other services.

Illustrations by QuickHoney for SmartMoney

SMARTMONEY 2012ANNUALBROKERSURVEY

$4.95Price of a stock trade onZecco andTradeKing—but both charge steepfees for other services.

Illustrations by QuickHoney for SmartMoney

SMARTMONEY 2012ANNUALBROKERSURVEY

investments—including options, futures and cur-rency trading—that yield higher commissions. Charles Schwab, for example, courted both the active and the exotic last year by buying tech-proficient specialty broker Options Xpress. 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. Dur-ing a pilot program for Zecco’s new iPhone trad-ing app in January, the already active customers who were selected to get a first crack increased their trading activity by 10 percent. 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 con-sumers increasingly expect their brokers to be able to respond instantly, says Lo. “God forbid something goes wrong with a trade.” For our an-nual broker survey, SMARTMONEY took a close look at which firms did and did not live up to such expectations.

COMMISSIONSAND FEESBEST: SCOTTRADEWORST: WELLSTRADE When SMARTMONEY did its first discount bro-ker 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

Illustrations by QuickHoney for SmartMoney

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 na-tion’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 of-ten 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 under-stood their brokerage's commission structure, down from 52 percent the year before. Count Jeff Fleishhacker among the confused. Fleish-hacker, an IT manager at a non profit in Brook-lyn, 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 cre-ated 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

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$7.95 ★★★ ★★★★★ ★★★★★ ★★★★★ ★★★★★ ★★★

7.00 ★★★★★ ★★★★ ★★★★★ ★★★ ★★★★ ★★★★

9.99 ★★ ★★★★ ★★★★★ ★★★★★ ★★★★★ ★★★

9.99 ★★ ★★★★ ★★★★ ★★★★★ ★★★★★ ★★★★

8.95 ★★★ ★★★★ ★★★★★ ★★★★ ★★★★★ ★★★

4.95 ★★★ ★★★ ★ ★★★ ★★ ★★★★★

4.95 ★★★ ★★★ ★ ★★★ ★★★ ★★★★

6.95 ★★ ★★★★ ★★★★★ ★★★ ★★★ ★

9.95 ★★★★★ ★ ★★★ ★★★ ★★ ★

8.95 ★ ★★★ ★★★★ ★ ★ ★

COMMISSION

ON STOCK **PER TRADE**

COMMISSIONS†AND FEES†

MUTUAL FUNDS AND

INVESTMENT PRODUCTS

BANKINGSERVICES

TRADING††TOOLS††

‡RESEARCH‡

CUSTOMERSERVICERANK* BROKER COMMENT

*Criteria are not equallyweighted. **Commission on a100-share trade at $20a share. †Forclientswith a brokerage balance of $50,000whomake asmany as five trades amonth. ††Includesdata fromGomez. ‡Includes data fromCorporate Insight.

2012BROKERRANKINGS

FidelityFidelity.com

ScottradeScottrade.com

TD AmeritradeTDAmeritrade.com

E-TradeETrade.com

Charles SchwabSchwab.com

TradeKingTradeKing.com

ZeccoZecco.com

Merrill EdgeMerrillEdge.com

ShareBuilderShareBuilder.com

WellsTradeWellsFargo.com

Top spot for third year running.O�ers the biggest selection o� undsand the most comprehensive website.

Doesn’t have the cheapest stocktrades but compensates for that withfew fees on nearly everything else.

Want to trade? Its website andmobileapps are top-notch, but slow e-mailand phone response times hurt.

Its 24-7 online chat feature is a nicetouch, but its fees are above those atrival firms.

O�ers a wide assortment ofinvestment and banking options. Itsfees on some services aren’t cheap.

Has strong customer service, butcustomers can’t get stocks listed onforeign exchanges.

Doesn’t have risk-assessment orautomated asset-allocation tools.Lacks many banking services.

It can be your bank and your broker,but high fees and slow-to-executetrades keep it from ranking higher.

O�ers low fees, but its customerscan’t buy individual corporate orgovernment bonds.

Online trades were slow to execute.Got lowmarks for its website, tradingtools and research o�erings.

$4.95Price of a stock trade onZecco andTradeKing—but both charge steepfees for other services.

Illustrations by QuickHoney for SmartMoney

SMARTMONEY 2012ANNUALBROKERSURVEY

EdwardJones

EDWARDJONES.COMNUMBER OF BROKERS: 12,300NUMBER OF BRANCHES: 11,450NOTEWORTHY:Best stock picksin 2011

■ Edward Jones bounds back intothe top spot in our survey, in nosmall part because of its stockpicking in 2011. Not only did thefirm’s recommendationsoutperform Standard & Poor’s500-stock index, but its customersalso gave the firm high marks forits stock research. That helped thebrokerage recover from its poorshowing as a stock picker last year.The St. Louis–based firm says thatin 2011 the market favored thelarge, high-quality stocks (thinkColgate-Palmolive and IBM) that itgenerally recommends. On the techfront, Edward Jones has beendiving into social media—postingvideos about investing strategy toits YouTube channel and tweetingdaily on Twitter. It also gets highmarks for customer satisfactionand trust in independent surveys.

UBS

UBS.COMNUMBER OF BROKERS: 11,200NUMBER OF BRANCHES: 300NOTEWORTHY: Strong website andcustomer satisfaction

■UBS is among a handful o� ull-service brokerages that get it whenit comes to the Web, a factor thathelped it leapfrog from fourthplace last year. Research firmCorporate Insight found the UBSsite particularly comprehensiveand easy to navigate. Its manyfeatures include clear and detailedstock charts that let users add andsave their own research notes;sophisticated active-trader types,meanwhile, can feast on arcanetechnical indicators like BollingerBands and stochastics. (Investorsto whom those terms meannothing needn’t feel le�out:UBS also gets high marks for thesimplicity of its statements.)The U.S. arm of this Swiss financialgiant has created a “travelingo�ce” mobile application forits advisers.

RaymondJames

RAYMONDJAMES.COMNUMBER OF BROKERS: 5,100NUMBER OF BRANCHES: 2,350NOTEWORTHY:High customersatisfaction

■ Last year, Raymond Jamesredesigned its customer websiteand added an online-bill-paysystem, both enhancements welike to see. But glitches remain: Thesite still fares poorly for user-friendliness, according toCorporate Insight. Chet Helck, thechief executive o�cer of the globalprivate client group, says the firmhas hired a new technology teamand the website is continuing toevolve, with more changes“ on tapthis year.” Clients, overall, remainhappy, however: In a survey by J.D.Power & Associates, they gavetheir relationships with theirindividual Raymond Jamesadvisers particularly high marks.Compared with its competitors,the firm also does a good job ofclearly communicating itscommissions and fees.

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FULL-SERVICEBROKERSYoumight think themost a�uent investorswouldget thebest techtools. But surprisingly enough, experts say,most full-servicebrokers arebehind the technological curve; theirwebsites lackfeatures that are standardamongeven run-of-the-milldiscounters. Gettingwired is a trickybalancingact for the full-service crowd. “Wedon’t everwant technology to take theplaceofthe relationship,” says JimWeddle,managingpartner at EdwardJones. Indeed, full-service brokerswant toavoid the impressionthat theyareabandoning thehand-holding that sets themapart(andhelps justify their prices). Still, somebrokers are catchingup—not least becausebetter technology can improve customerretention, saysBill Doyle, an industry analyst at ForresterResearch.

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 observ- ers 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 Wells- Trade, the online discount-brokerage

1 HOUR, 9 MINUTESTime it took TradeKing to respondto our customer-service e-mail

45HOURSTime it took TDAmeritrade

to respond

MerrillLynch

ML.COMNUMBER OF BROKERS: 17,300NUMBER OF BRANCHES: 722NOTEWORTHY:Big websiteimprovements

■Merrill has invested in anupgraded website for its full-service customers and launchedmobile applications that allowcustomers to trade and evendeposit checks. Still, the firmhasn’t regained the trust of clientssince the financial crisis. In a recentpoll by independent research firmForrester, only 40 percent of thebroker’s customers agreed with thestatement“ my financial adviserdoes what’s best for me, not justits own bottom line.” That’s upfrom a year ago, but it remainsamong the lowest of the brokerswe reviewed. John Thiel, the headof U.S. wealth management forMerrill Lynch, says this is anindustrywide problem: In thea�ermath of the financial crisis, hesays, many investors still distrustWall Street in general.

Wells FargoAdvisors

WELLSFARGOADVISORS.COMNUMBER OF BROKERS: 15,250NUMBER OF BRANCHES: 1,500NOTEWORTHY:Ranks last in customersatisfaction

■Among the brokers in oursurvey, Wells Fargo ranked last in acustomer-satisfaction poll by J.D.Power, with the broker’s clientsgiving it low marks for theperformance of its investmentrecommendations and for what theclients perceive as high fees. Thosescores contributed to Wells Fargofalling two notches from our 2011survey. Brand Meyer, a seniormanaging director at Wells Fargo,says the firm’s internal researchshows that customers are satisfiedwith their own advisers.Meanwhile, Wells Fargo has otherstrengths to build on, including itsaccount statements, which featurea chart outlining an account’sgrowth on the first page and havebeen hailed by independentresearch firm Dalbar as “anindustry-leading concept.”

Morgan StanleySmith Barney

MSSB.COMNUMBER OF BROKERS: 17,650NUMBER OF BRANCHES: 765NOTEWORTHY:Website gets lowmarks

■Customers are clearly stilladjusting to all the changes at thismegasize broker, which emergedfrom the financial crisis followingMorgan Stanley’s purchase ofSmith Barney from Citigroup in2009. Thousands of brokers havejumped ship, and customersatisfaction has dropped steeply. Inthe most recent J.D. Power survey,Morgan Stanley Smith Barneycustomers gave the firm mediocremarks with regard to theirrelationships with advisers. Itscustomers aren’t happy with feeseither. (A spokesperson for thefirm questions the J.D. Powerresults, saying the survey “skewsto a lower demographic than ourcustomer base.”) On the brightside, the broker’s website stillranks among the better and clearerin the group.

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arm of Wells Fargo, charges $95 to close a retirement account—a fee the company says is on par with its full-service broker-age. 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 administra-tive 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 ser-vice; Zecco says it needs to charge such fees to keep its trading commissions low.)

CUSTOMER SERVICEBEST: TRADEKINGWORST: WELLSTRADEThe 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 Fi- nancial Industry Regulatory Authority, the industry’s self-financed regulatory body. Part of this détente, 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.

$4.95Price of a stock trade onZecco andTradeKing—but both charge steepfees for other services.

Illustrations by QuickHoney for SmartMoney

SMARTMONEY 2012ANNUALBROKERSURVEY

14.5SECONDSProcessing timefor a trade on

WellsTrade—fourtimes slower thanthe fastest brokers

But brokers say they’re also pushing to improve the relationship by being more accessible. Increasingly, that means of-fering a growing number of digital op-tions, from online chats to responses to customer tweets. All of the brokers in our survey except for Wells Trade 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 cheap-er than staffing call centers, says Lo of J.D. Power. Still, the digital communication is hardly seamless. Three of the 10 broker-ages 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 over zealously: When we sent an email through the public website inquir-ing about opening an account, we were required to give a phone number, and the company called us back four times be-fore 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 ad-vice is helpful. TradeKing, our category winner, does a lot of communicating via social media and responded the fastest to our test emails. But Doug Sarbon, an Atlanta audio engineer, has been rely-ing on its phone service. Sarbon began calling TradeKing’s customer-service line almost daily back in 2009, when he first started trading options, some-times talking to the representatives for a half hour at a time. After the mar-ket 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

RESEARCHBEST: FIDELITYWORST: WELLSTRADETen 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?” To-day these research offerings are simulta-neously 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 inves- tors trade ideas with each other, can drive up trading volume; they’re a “good, inex-pensive marketing tool,” Fonseca says. Indeed, research tools have become so important that most of the brokers we reviewed are pretty evenly matched. Corpo-rate Insight, a financial-servic-es 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 ag- gressive about relaying research via Twit- ter and Facebook. The brokerage has been moving many of the trading tools

and research features from its Active Trader Pro platform—including sophisti- cated 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 “democ-ratizing” those tools. On the other hand, Wells Trade lacks a few of what have be-come 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 TOOLSBEST: FIDELITYWORST: WELLSTRADEKirk Dupless is, a 28-year-old consultant in Leesburg, Va., says he supplements his income by trading briskly on the options market. And while Dupless is, a former in- vestment banker, is pretty sophisticated about the market, he does most of his trading on Think or swim, 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 in- vestors are comfortable trading at 3 a.m. (“We call it bedside trading,” says a TD Ameritrade executive), trading tools have

with a friendly rep. He is sometimes put on hold for awhile, he acknowledges, but he has been entertained by the money- themed hold music—especially Kenny Rogers’s “The Gambler.”

4,800No-loadmutualfunds availablethrough Zecco

700No-load funds

available throughShareBuilder

Some brokeragesspecialize in foreign-currency trading. To seeour rankings on thosecompanies, go toSmartMoney.com.

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 report- ed that their mobile applications are hav-ing 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 sur-vey, 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 tech-nical upgrades are improving trading speed; Wells Fargo says security mea- sures might add extra seconds to its trad-ing time.

MUTUAL FUNDS ANDINVESTMENTSBEST: FIDELITYWORST: SHAREBUILDEROne 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 for- mer category—think Fidelity, Charles Schwab and TD Ameritrade—have tried to offer just about every investment op- tion a customer can think of, from gazil-lions of mutual funds to more-exotic fare, including futures, foreign-exchange trades and options. Of course, brokers who provide these aren’t just being altru-istic; 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 on-line customers now trade options, ac- cording 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. Fi-delity, however, offers a stunningly wide range of investing options to most of its customers, and it's there as on why it wont his category. For example, all of Fi-delity's retail brokerage clients can now register online to trade directly in for-eign markets. Some brokers prefer to stick with meat and potatoes. ShareBuilder, which focuses almost exclusively on stocks, mu-tual funds and exchange-traded funds, finished last in this category. Dan Green shields, 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.

BANKINGBEST: MERRILL EDGE,FIDELITY (TIE)WORST: ZECCOA few months ago, Fideli- ty threw its marketing muscle behind a new product rollout, an-nouncing the debut with breathless press releases and even a live Twit-ter broadcast. Was all the hype about invest-ing? Far from it: The new product was an iPad app that lets customers take photos of checks,

so they can deposit them into their Fi-delity accounts. And while Fidelity was the first broker to get the feature on an iPad, that firm and many of its competi- tors already had photo deposits for

smartphones. (Charles Schwab says it now gets half of its customer deposits via digital picture.) The tech ramp-up maybe 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 ac-counts. 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 attrac- tive perks, like higher interest rates on savings accounts—or refunds on the ATM fees charged by “real” banks. Some bro-kerages offer these perks only to their ac-tive 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 bank-

ing amenities—no credit cards, no ATM-fee reim-bursements. (Raneri, the CEO of last-place broker Zecco, says such services don’t fit with its focus on active traders.)