Choosing An Online Broker

Most -- but not all -- brokerage Web sites now slap on a slew of fees

As TV detective Theo Kojak used to quip: "Who loves ya, baby?" That's the question online investors need to ask themselves these days. Many who are venturing back into the market will find a rather frayed welcome mat. The majority of the most popular places to trade via the Internet -- 12 brokerage firms handle 75% of all online trades -- have instituted a multitude of service levels. The amount you pay to play -- as well as the kinds of research and tools you can use -- often depends on which level you qualify for. Have $1 million to invest? Or a mere $30,000 in household assets -- but you make more than 120 trades a year? Then, will charge only $8 for a market or a limit order. Don't have much cash -- or the itch to shop for stocks once or twice a week? Then a limit order will cost you $37.95, plus 2 cents for shares after the first 1,000.

Fidelity isn't the only one that plays favorites. Harrisdirect, QuickandReilly, and TD Waterhouse also offer deals to those with higher assets or more frequent trades. Everyone is chasing the most active traders, says Dennis Ceru, director of retail brokerage and investing at TowerGroup, a research and consulting firm. The most industrious investors might make up 20% of a firm's client base but generate 80% of revenues, he adds. Firms that once chased market share now turn a sharper eye on what contributes to the bottom line.

If you're a smaller fry or a buy-and-hold type who doesn't trade very often, it's not enough to ask where on the pricing pole you rank. Firms also have a variety of special fees that come into play for some but not others. If you sign up for the new Schwab (SCH ) Trader CT, designed for active traders, then don't trade all that much, you could face a $30 or $40 monthly fee. Other brokerages charge if your account falls below, say, $25,000. If that makes you mad, look before taking your business elsewhere. There might be a charge for that, too: Merrill Lynch (MER ) Direct and Schwab charge as much as $95 for transfers.

A brokers' best customers also get access to additional research and sophisticated tools. NASDAQ Level II quotes, which not only show current buy and sell prices but all standing orders as well, are a frequent perk for top traders. Streaming quotes across your PC screen is another. There may be additional analyst reports for some -- or a charge for investors who don't measure up. American Express (AXP ) reserves Lehman Brothers (LEH ) research for those with accounts of $100,000 or more. At Harrisdirect, only six-figure accounts get access to Credit Suisse First Boston (CSR ) reports.

ONE SHINING LIGHT. Don't get discouraged, though, if you're not in the big leagues. Merrill Lynch Direct has only one class of service. And while BrownCo offers additional research bells and whistles for its Select and Elite clients, it still charges everyone the bargain-basement price of $5 (plus 1 cents a share after 5,000 shares) to place a market order. Scottrade, which ranked tops in investor satisfaction in J.D. Power & Associates' 2003 online-trading study, charges a low $7 to all and -- like E*Trade Financial -- assesses no inactivity, minimum-balance, or exit fees. "Scottrade is one of the few making that segment feel welcome because it's not hitting them up with fees," says Ellen Guion, a senior research manager at J.D. Power.

Scottrade has prospered by combining low costs and good customer service (calls go to a local branch), says Guion. It's the only major online firm that has grown significantly in recent years by pulling in new accounts rather than by acquiring competitors, she says.

The ability to execute trades efficiently is now a commodity -- any name-brand site can do that, says John Bajkowski, vice-president of the American Association of Individual Investors, a nonprofit focusing on investor education. So you should match your investing style to the broker best suited to serve it. If you're an active trader, look for a site with cost breaks or features for frequent or large trades such as Schwab Trader CT or TD Waterhouse. Want some hand-holding? Go for a broker with lots of research, such as Scottrade or Fidelity, and maybe one with access to an adviser.

Want to buy and sell mutual funds online? Make sure you're at a site where funds are front and center. Schwab Trader CT's active clients get lots of neat tools and info, but they can't buy a fund without calling a broker. Fidelity and T. Rowe Price (TROW ) are known for their proprietary mutual funds, in addition to the thousands from other companies on their sites.

Buying bonds or trading options are specialized services not always available online. You can't buy bonds at American Express, QuickandReilly, or T. Rowe Price. Nor can you trade put and call options at American Express.

For those who pine for a relationship that focuses more on money management than trading, American Express, Merrill Lynch Direct or SmithBarney Access, the brokerage's Web site, might be a good choice. (Smith Barney declined to give pricing details.)

If you just want to trade online once in a while, watch out for sites that herd customers into lower levels, then stick them with higher costs and extra fees. There's bound to be some other site that will treat you better.

By Carol Marie Cropper

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