Brokerage Service
Buying Guide

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Brokerage Service Buying Guide

Getting Started

Whether you're a seasoned investor, a newbie, or someone retesting the waters after a scary loss, financial-services companies want your business. But aside from potential incentives, what will you get for moving your accounts? Is the service up to par? Is even free advice worth your time?

In late 2011 Consumer Reports investigated what financial-services companies were really providing to their customers. We surveyed our online subscribers about their experiences with their brokers. We sent staff members into brokerage offices in New York and Washington state to experience how clients seeking advice are served. And we asked major financial-services companies to prepare investment plans based on the profiles of five of those staff members. Two independent financial planners and their teams evaluated the appropriateness of the advice in the companies' plans.

Our results revealed good news and cautionary notes. If you're an active investor, like most of the subscribers who responded to our survey, you can feel good about the level of service and help you'll get at major U.S. brokerages, we found. We also discovered that investors of all stripes can get free, basic investment plans from several financial companies. But to make the most of that advice, you'll need to understand the process and be aware of the plans' limitations.


Highlights of Our Investigation

Our readers were very satisfied with 10 of 13 major brokerages. USAA's brokerage arm led in overall satisfaction. Scottrade, an online broker, and Vanguard, the mutual-fund giant, also scored very highly overall.

In our field test, participants encountered some questionable sales tactics. One staff member was shown a chart on a portfolio's performance that omitted the significant impact of fees. Another tester was pitched a complicated annuity product though the adviser knew little about her.

Plans prepared for us by Citibank and T. Rowe Price had somewhat more appropriate advice. Two expert financial planners analyzed 20 investment plans created for us by Citibank, Fidelity, Schwab, and T. Rowe Price, and judged them about equally good. Citi and T. Rowe Price earned somewhat higher marks for the appropriateness of investment recommendations. Citibank's approach toward planning was deemed more comprehensive than the others'.

Still, our judges found inappropriate advice in several plans. They also found most of the documents to be filled with boilerplate language and short on real, actionable advice.

Our Readers Rate Brokerage Firms
All the brokerages in our survey of online subscribers earned high marks for customer service, and for helpfulness, specificity, and clarity of the financial advice provided. The higher the respondents' balances, the more satisfied they tended to be, therefore the Reader score was adjusted for account size. The strongest predictor of satisfaction was how much their accounts had grown.

Notably, our brokerage ratings appeared to reflect the experience of active investors. Sixty-one percent of survey respondents reported having more than one brokerage account. Of the respondents who made trades in the last 12 months, more than half—54 percent—had traded from six to more than 20 times. The advice those readers experienced could have been anything from a quick confirming phone call to a full-blown financial plan.

USAA Leads in Satisfaction
No one type of brokerage led the pack. Top-ranked USAA is part of a financial company with insurance, banking, and brokerage services. Scottrade and Vanguard, which tied for second place, are respectively an online brokerage and a mutual-fund company.

Wells Fargo, Merrill Edge/Bank of America, and Morgan Stanley Smith Barney scored lower than other brokerages. The survey didn't take into account whether recent mergers affected our readers' judgments of their service. Wells Fargo was in the midst of integrating Wachovia over the 2011 survey period. Morgan Stanley's merger with Citigroup's Smith Barney unit was announced in 2009. Bank of America had completed its purchase of Merrill Lynch.

Within customer service, consumers had the most gripes about how their brokerages had handled errors or mistakes; 37 percent were less than highly satisfied in that category. Seventeen percent of respondents going online for help reported that they couldn't find information they needed on their brokerage's website.

Fees also irked some consumers. Ten percent of those reporting on Merrill Edge and 9 percent reporting on Morgan Stanley said they'd been charged unexpected fees.


Judging the Free Advice

We learned that free investment advice from financial companies was not always free. To be eligible, our testers had to have an account, and some companies require a specified level of assets.

Most of the financial advisers we encountered at that entry level appeared to be brokers (also referred to as registered representatives) and not certified financial planners. The distinction is important: CFPs pledge to adhere to a fiduciary standard, meaning they must put their clients' interests ahead of their own and disclose all conflicts of interest. Brokers are held to a suitability standard, meaning only that their recommendations must be suitable for you. So a broker could suggest a particular mutual fund that fits your asset-allocation needs but has higher fees than other, comparable options. (Complicating matters, brokers might also be "dually registered" as investment advisers. And as advisers, they're held to the fiduciary standard, but they can switch hats and be held to the suitability standard when selling products to follow through on their recommendations.)

There's no arguing with the price, but we wondered whether free advice was worth consumers' time. So in late summer and early fall of 2011, seven Consumer Reports employees in New York and Washington state went as themselves to branch offices or websites of banks and investment companies where they held accounts and asked each for an investment plan. They didn't mention that they also were doing research for a Consumer Reports article.

We also sent profiles and financial information for five of the testers, who were not identified, to four major financial companies—Charles Schwab, Citibank, Fidelity, and T. Rowe Price. The companies received identical information but were allowed to e-mail the participants additional questions through a reporter. Testers also filled out the companies' questionnaires, which asked about their tolerance for risk and other concerns. (Four companies—JPMorgan Chase, Merrill Lynch/Bank of America, Vanguard, and Wells Fargo—declined to take part.)

What We Found
Two seasoned certified financial planners and their staffs judged the plans the companies sent back on a number of criteria, such as appropriateness of investment recommendations, ease of use, and quality of the overall process. Diahann W. Lassus, CFP, CPA/PFS, is president and chief investment officer of Lassus Wherley, a fee-only financial-planning company in New Providence, N.J., and Bonita Springs, Fla., and past chair of the National Association of Personal Financial Advisors. David Yeske, CFP, is managing director of Yeske Buie, a fee-only planning firm in San Francisco and Vienna, Va., past chairman of the Financial Planning Association, and distinguished adjunct professor at Golden Gate University, focusing on financial and insurance planning.

Our judges also commented on several plans obtained in the field test, some of which were from the four companies. (We sent the plans masked of identifiers to reduce judges' bias.)

In the field, our test subjects learned that advice doesn't always come easy. Those without a significant amount of assets, or the right kinds of assets, were sometimes rebuffed. Katerina, 33, who wished to roll over a five-figure Merrill 401(k) to a Merrill IRA, found that by law she couldn't get advice until she moved that money. When a tester with a Citibank account asked an adviser for free advice without committing to moving additional money to Citi, the rep told her, "Why would I do that?" (The rep later provided advice after the tester showed her financial statement.)

At Fidelity, clients with an account of any size can in theory walk into an office or call an 800 number for a free consultation and guided tour through Fidelity's planning software. (Fidelity says the software its advisers use is essentially the same as what you'll find on its website.) But unless your investable assets are worth at least $250,000, you're not guaranteed a dedicated Fidelity adviser. "I would be assigned to a strategy adviser group of 75 to 85 people, not to any one adviser," Carolee, a midcareer staff member, said after a phone consultation with Fidelity. For that group service, she was told she'd be charged about 1.13 percent of her account per year.

Once in the door, our subjects faced subtle and strong sales pitches. "He sent me pretty quickly to his recommendation: a balanced, managed set of funds without reviewing or comparing the other options," said David, our "empty-nester," after a first visit to a suburban Chase office in Seattle.

The company representatives had titles such as "account executive," "financial adviser," "financial consultant," "financial planning specialist," and "investment adviser." Just three of the nine advisers consulted by the test participants seemed to hold a certified-financial-planner designation. And the advisers didn't initially mention or were often vague about how they'd be compensated, with one exception: a Citi adviser who said she was "salary based."

The Finished Product
Most of our participants received an initial plan at their second visit. Some spoke in the interim on the phone to supply more information. David, our tester outside Seattle, was very satisfied with his Schwab adviser's research. The adviser reviewed his client's investment statements, spending records for the previous six months, current income information, and expected income in retirement. "He spotted immediately that our top priority is not our retirement investments but the restoration of our emergency-cash reserve," David said.

In New York, Thomas, a 44-year-old father of two, visited a Fidelity adviser with his wife and got an initial plan after just one visit of almost 2 hours and some follow-up phone calls. They discussed the role of diversification, asset allocation, the risks associated with various investments, expenses and costs, tax implications, and how various life decisions could affect returns. "The meeting was relaxed, not rushed," Thomas said. "He seemed to do a decent job of hearing our concerns." That jibes with our survey results, showing that Fidelity and Schwab clients were happy with the helpfulness, specificity, and clarity of the advice given.

Other testers had less-satisfying experiences. At his third visit to the Chase office, David was shown a historic simulation report that compared the 11-year performance of the Chase Strategic Portfolio, 5.98 percent, with a benchmark index's 3.87 percent. But the report didn't take into account Chase's annual management fees of 1.6 percent for the first $250,000 in assets, which would lower the portfolio's performance to 4.38 percent, not much above the benchmark. Lassus told us that Chase's 1.6 percent management fee was higher than the usual 0.75 to 1.5 percent. Both judges agreed that the illustration wasn't consumer-friendly.

"Even when reporting aggregate performance for all portfolios combined, we account for fees," Yeske said. "We feel it's a fuller form of disclosure."

In general, Lassus said, the plans generated by advisers in the field offices were not as high quality as those that the corporate offices provided. That should come as no surprise, given that the corporate-based advisers ostensibly had lots of eyes viewing their plans. Nevertheless, only one plan from any source, a Vanguard plan created for Don, 60, considered the tax implications of changing his investments. "They projected estimated capital gain or loss for each transaction," Lassus said. "This was a good feature."


Results of Our Corporate Test

Citibank, Fidelity, Schwab, and T. Rowe Price all made it clear that the plans they were providing for our project published in 2012 were not based on an ideal process. Normally, planners would have an ongoing conversation with the client. The back-and-forth over many sessions would help the advisers fine-tune the plans and gauge a customer's reaction to recommendations. Even after implementing a plan, an adviser would contact the customer at least once a year to adapt the plan as needed. "This is definitely an ongoing process," said Brennan Miller, a Charles Schwab financial consultant in Northbrook, Ill., who took part in the project.

Many of the plans provided only asset allocations, not more-specific recommendations. The plans offered us a look at each company's approach to financial planning. And the companies' plans had some features in common.

Plans were often long and confusing. Plans from the field and from the corporate planners were often larded with boilerplate language and unnecessary tables and graphs. In general, Citi and Schwab were the worst offenders, with most plans running more than 70 pages long. "Too much to keep track of," Yeske said.

Advice didn't always address clients' questions. T. Rowe Price's plan for Thomas and Jean didn't include their goal of saving for college for their two children. And it wasn't able to accommodate David and Joanne's plans to retire six years apart. A T. Rowe Price planner later told us that the company's software is designed only to address retirement and asset allocation—and only when both members of a couple plan to stop work at around the same time. "It's really just a function of our systems and our modeling," she said.

Plans left out explanations. Plans generally advised a mix of large-cap, mid-cap, and small-cap stock mutual funds, and international holdings and bond funds, but none explained what the asset categories meant. (Large-cap stocks, such as those in the Standard & Poor's 500 index, are major companies with market values of more than $4 billion. Mid-cap stocks generally have values between $1 billion and $4 billion, and small-cap companies are valued at less than $1.4 billion. Smaller companies generally are riskier, though they have greater potential for growth than large-cap stocks.)

Asset allocations tended to be conservative. Every company hewed to an asset allocation of 50 percent in equities for Don, our tester on the cusp of retirement. Yeske's team labeled that ratio as low for such a young retiree. Even a low average annual inflation rate of 3.5 percent would double a retiree's cost of living in 20 years, Yeske said. For that reason, he'd recommend a young retiree, especially one like Don, with a sizable pension, put at least 70 percent in stocks to hedge against inflation. Maria Selca-Maher, a planner from Citi, said her team had reduced Don's original equity allocation based on guidance from her company's chief investment officer. "In an actual relationship," she said, "Don's financial adviser would continue to review his portfolio and make adjustments based upon his needs and Citi's investment research."

Our judges also found good advice and some nice personalized touches. Fidelity offered some detailed recommendations up front for all five clients. Yeske's group praised Citi's timeline to follow through on its advice and the company's research on long-term-care insurance options for Don, the pre-retiree. The judges praised T. Rowe Price's reports for their relative brevity and readability.

Yeske's team said that the plans need to be accompanied by time-intensive discussions and follow-up. Lassus was a bit more generous. "Individuals who are just getting started might find this type of planning helpful in terms of the education and the process," she said. "The process also pushes them to think about their goals and objectives." 


What You Should Do

If you can't afford to pay much for investment advice and you satisfy your financial-service company's criteria for getting a free plan, ask for one. Just be aware of their limitations and potential strings. "The companies are not doing the free plan for altruistic reasons," Lassus said. "They are doing it to accomplish an objective: selling products or establishing a relationship for the long term."

Following these steps will help you get the most personalized plan possible.

Don't hold back information. Most of the corporate-based planners told us afterward that they found it easier to plan for David and Joanne, who volunteered the most about themselves and their attitudes about money. Judges said they gave Citibank and T. Rowe Price plaudits for asking good follow-up questions. In theory, the more questions you answer—and ask—the better your plan is likely to be.

Take the time needed. Most of our participants who got plans in the field visited or talked with their advisers just once or twice before receiving an initial plan. But to get the best plan, you'll need to have an ongoing conversation with the adviser. Planners we interviewed said they recommend revisiting the plan at least once a year with an adviser, and often much more frequently. "We talk to customers throughout the year," David Olsen, a regional planning consultant in New England for Fidelity Investments, said.

Get organized. Our testers spent from 20 minutes to about 20 hours collecting all the information the advisers needed. (The median time spent was 3½ hours.) "This has been a useful exercise already," David said. "This is the first time in years that we have added up all our investments and pensions to see where we really stand."

Before you visit an adviser, gather your most recent investment statements, including those from employer-sponsored retirement plans, estimates of any expected pension income, tax returns for the last two years, details of your life-insurance coverage, and six months' worth of spending records. (Intuit's Quicken and its free online cousin, Mint, offer good ways to track spending.)

Our judges agreed that spending more time with an adviser would add the most value to any plan. During those conversations, insist on understandable explanations for the recommendations and the full cost of carrying them out.

Get a second opinion. For a fee of a few hundred dollars, less than you'd pay for a full-fledged financial plan, you can bounce your adviser's plan off of a professional planner. For example, the Garrett Planning Network (, made up of more than 300 independent financial advisers, offers hourly, as-needed financial planning and advice. In fact, it wouldn't hurt to let your adviser know that another expert will review your plan, just to keep him on his toes.

Questions to ask an adviser.
• How are you being paid? Is it a salary, commissions, fees based on assets, hourly, or a flat fee?
• What is your objective in offering a free plan? Are you looking to sell products or is this a loss leader to encourage me to sign on with you?
• What are the transaction fees and expenses related to the recommended investments? What, if any, are the fund's 12b-1 sales fees and loads? Are the loads paid up front or when I sell the fund?
• What are the potential conflicts of interest in the funds you recommend? What, if any, is your incentive to recommend one fund family over another?
• How do you or your firm choose the funds you recommend?
• What's your educational and professional background? How much experience do you have advising investors like me?
• How will you carry out or help me carry out my plan? Will you provide a step-by-step action plan?
• How much follow-up will we have, and what will it cost?


Pitches, Hedges, and Fudges

Whether you're paying for advice or getting it free, keep an eye out for these red flags seen by our testers who shopped in late 2011 for investment plans.

Variable annuity pitch. One tester in her mid-50s and focused on early retirement was offered a Prudential variable annuity at her first meeting with a Citibank adviser. Variable annuities, marketed to pre-retirees seeking guaranteed income, are complex insurance products that can include costly embedded fees. "A variable annuity has a number of tax- and investment-related features that would demand extensive analysis before a recommendation is made," David Yeske, a certified financial planner who served as one of our project judges, said. If an adviser brings this up after just meeting you, find someone else.

Focus on proprietary funds. Some testers received recommendations that included mainly funds from the investment company they were visiting. No surprise there. But always ask what other, similar alternatives are available, and at what cost. You'll want funds with low expense ratios. Sometimes the house brand might be the best option.

Sealed lips on compensation. Few of the advisers our testers met in branch offices volunteered how they were compensated. You have a right to know whether the adviser is being paid a salary, a commission based on sales, a percentage of the assets managed, or some other way. Ask on your first visit. And once you see the adviser's detailed investment recommendation, ask again for a full accounting of the fees involved with purchasing the investments, holding them over time, and selling them.

Target-date-fund recommendation. If you don't have a large retirement nest egg, your adviser might suggest a target-date fund, which is a portfolio of stock and bond funds based on your expected retirement date. Over time the asset mix shifts to favor bonds. Target-date funds appear to be good options for investors who want to manage their own accounts with little fuss. But Consumer Reports Money Lab recently observed that 4 out of the 10 largest target-date fund families offered at least one fund with expenses in excess of 1 percent annually. (Vanguard's index-based target-date funds in our study were the least expensive, with average expenses below 0.2 percent.) Ask the adviser to lay out the costs and alternatives.

Silence on fiduciary duty. None of the branch-office and phone advisers at the brokerages and banks mentioned fiduciary duty—that is, an obligation to act in the best interest of the client. We surmise that most were acting as brokers, who need only make "suitable" recommendations. If your adviser doesn't volunteer his or her credentials, ask for them.