In the past threeyears leading e-brokers E*Trade Financial (ETFC ) and Fidelity Investments have slashed their commissions on stock trades to as little as $7, prompting many observers to wonder: How low can they go? Now three rivals have come back with a surprising response: How about free?
Bank of America (BAC ), Wells Fargo (WFC ), and upstart broker Zecco.com have each started hawking $0 trades to lure online brokerage customers to their portals. They each have their appeal. The online offers at Bank of America and Wells Fargo make the most sense for current customers. Do-it-yourselfers who don't need a lot of extras may find a nice home at Zecco. But don't be blinded by these deals du jour. The free-trade offers come with trade-offs.
For one, you may need to cough up a lot of cash to qualify for the $0 commission. BofA requires a minimum of $25,000 in assets outside of a brokerage account in checking, savings, or certificates of deposit at the bank. And unless you have $50,000 in your brokerage account, you'll need to pony up an extra $50 twice a year, with a few exceptions. Wells also has a $25,000 minimum, but it counts your brokerage assets, credit-card balances, loans, and up to 10% of mortgages, assuming you have them at Wells. If you don't maintain that magic $25,000 balance, Wells levies a hefty $25 tariff each month.
As an online-only broker, Zecco doesn't have such stiff requirements. To take advantage of Zecco's deal, you'll need to deposit $2,500. And you won't get whacked with fees if your account falls below that level, making it one of the better options for investors who are just starting out and don't have a big nest egg.
Not surprisingly, commission-free trading doesn't mean unlimited free trading. BofA, Wells, and Zecco all impose caps and charge extra for any trades beyond the monthly or yearly allotment. Zecco is by far the most generous, with 40 free trades a month and no more than 10 trades in a single day. That compares with 30 a month at BofA and 100 a year at Wells. After that, commissions run from $3.50 to $10.00 a trade. Remember, free applies largely to Internet trades. If you want to buy or sell a stock via a live broker on the phone, it costs extra. (Zecco is the cheapest at $19.99.)
Free isn't part of the vocabulary for mutual fund investors, either. Both banks offer a limited list of no-transaction-fee funds, including 1,300 at BofA and 2,000 at Wells; Zecco charges $10 per trade for no-load funds and doesn't offer load funds.
The biggest knock against these sites is that they simply don't stack up to more upgraded brokerages like Fidelity, Charles Schwab, and TD Ameritrade. Fidelity customers get free access to stock research reports from a dozen firms, including Lehman Brothers (LEH ), Standard & Poor's (MHP ) (like BusinessWeek, a division of The McGraw-Hill Companies (MHP )), and Prudential Equity Group, (PRU ) while E*Trade provides company and market commentary from seven outfits, such as independent firm Rochdale Research. Wells provides reports from S&P and Argus Research. Bank of America offers only S&P.
None of the three "free" sites allows investors to trade overseas stocks directly on non-U.S. exchanges. E*Trade has a cut-rate commission of $20 on such trades, compared with $100 or more at other brokerages.
When it comes to research, Zecco doesn't play the Wall Street game at all. Billing itself "the free trading community," it has opted to emphasize bloggers instead. Zecco's main Web page, which includes market headlines and financial data, links to relevant posts from both well-known bloggers and homegrown ones at the site. The quality of Zecco's bloggers is uneven. Dave Fry, founder of ETF Digest, posts detailed charts tracking trends in the world of index funds. But Joe's Money Blog does little more than compile the release dates of economic data that may affect foreign currency prices.
Still, Zecco offers the best bang for the buck--or rather no buck. Its deal doesn't appear to be a teaser that will disappear in a few months. Zecco contends that $0 trades are part of its long-term business model, which relies on advertising dollars and profits from interest on cash and margin accounts as well as premium services such as options trading to make money.
Some investors might question whether a small, new firm like Zecco would be able to handle a crush of orders in a market meltdown. It's a legitimate fear, but bigger players are hardly immune to such glitches. Investors faced delays of more than 60 seconds when placing trades at the Web sites of Fidelity, Vanguard, BofA, and Wells late in the afternoon of Feb. 27 as the market tanked, according to technology research firm Gómez. Yet E*Trade customers and those of smaller online brokers like TradeKing and thinkorswim didn't notice a thing.
Zecco is too new to have been included in the Gómez survey, but the online brokerage says it had no problems that day. So at least in this case, it was worth going with the little guy.
By Aaron Pressman