It had to happen. With online brokers driving down the cost of investing, someone was bound to latch on to the ultimate Internet price: free. In fact, an old-line broker, American Express, was the first to eliminate commissions, but only for clients with lots of dough. Now, three new online offerings aim to bring commission-free stock trades to the masses. "This is the next evolution in online finance," says Andrew Koslow, chief operating officer of San Francisco's Financial Cafe.com, which launched free trading in early May.
Perhaps it's the next evolution for brokers, but it's a dead end for investors. Yes, you can trade for free, but these sites are going to cost you in terms of service, time spent hacking through online advertising, or, worst of all, poor prices for stocks. Free brokers are likely to draw exactly the wrong investors: novices with small accounts who don't understand that $10 or $30 in commissions can be dwarfed by the cost of overpaying just an eighth of a point (12.5 cents) per share. "Investors may think they're not paying anything, but there are hidden costs," warns Securities & Exchange Commissioner Laura Unger. "It makes me nervous."
The trade-off is clearest at Freetrade.com (table). A unit of Omaha's Ameritrade Holdings, the site executes free market orders but provides virtually no service. Don't even try to call: All communications, including statements, are by e-mail. The site takes funds only by wire and won't transfer securities. Ameritrade, which draws 74% of its revenue from commissions, says it wants only experienced online investors to use Freetrade. But that's poor targeting: "The seasoned investor is looking for tools and one-stop service, not rock-bottom price," says Dan Burke of online rating service Gmez Advisors.
At the other end of the spectrum is FreeTradez.com. This Grand Blanc (Mich.) startup says its June 19 launch promises free Nasdaq Level II quotes and real people providing customer service 24-7. Of course, you'll have to endure advertising. Say you want a quote on "F," the ticker symbol for Ford Motor. A Ford banner ad will pop up--unless General Motors bought the space. Advertisers are queuing up, says founder Jasen Watkins.
That's bound to annoy investors, who are shopping for stocks, not cars. And at a top ad rate of $50 per 1,000 viewings, FreeTradez will have to subject customers to 200 ads to cover the cost of clearing one trade--and another 200 to pay for a month of Level II quotes.
Financial Cafe falls in the middle: While market orders are free, it charges typical commissions for limit orders and other trades. The broker will take payments from Nasdaq dealers that handle its orders, but a dedicated team will ensure that customers get good prices, says Koslow.
A decade ago, full-service brokers dismissed discounters by arguing: "You get what you pay for." They were wrong. Discounters and their online heirs proved you could get nearly as much service for a lot less. But for free? Not yet--not even on the Internet.