This article is the archived version of a report that appeared in May 2009 Consumer Reports Magazine.
Discount brokers did a better job shepherding their clients through the stock market upheaval of the past year than did traditional investment banks such as Merrill Lynch, according to a Consumer Reports National Research Center survey of almost 9,000 online subscribers.
Though half of our survey respondents said their investment portfolios plummeted, most were relatively happy with the level of service and advice they received. But generally those who used discount brokers were considerably more satisfied than clients of pricier, full-service firms.
Topping the list in overall satisfaction was USAA. Mutual-fund company Vanguard followed closely in the rankings. Bigger brokerages, such as Merrill Lynch and Ameriprise, placed lower in our Ratings.
Yet even among discount brokers there were some problems. E-Trade clients reported a higher number of phone-service problems and said they were unable to find information on the company's Web site 35 percent of the time. E-Trade, Scottrade, and TD Ameritrade were among the lower-rated companies for advice. That isn't surprising because they're bare-bones discounters most suitable for investors who make their own decisions.
The type of broker you use depends largely on how you invest. If you follow our long-standing advice and invest regularly in a diversified portfolio of index stock and bond funds, which can help you weather volatility in the market, pick a company that sells a range of low-cost funds tracking domestic and foreign stock indexes, such as Vanguard, Fidelity, or T. Rowe Price. That way you won't pay a commission every time you buy shares. Some discount brokers offer no-fee funds, but they might be limited to that company's funds or those in a preferred network. For example, you'll pay $50 to buy a Vanguard or T. Rowe Price fund in a Charles Schwab account and another $25 if a Schwab broker places the trade.
If you buy stocks or exchange-traded funds (ETF), online trading is the cheapest way to invest. Automated phone orders cost slightly more, and broker-assisted trades are the most expensive. Scottrade.com charges only $7 per stock or ETF trade online and $27 for broker-assisted trades. It offers some no-fee mutual funds in its preferred network; other funds cost $17 per trade. Merrill Lynch Direct charges $30 per online stock trade and a base rate of $50 to $150 (plus a possible surcharge, depending on the number of shares) for broker-assisted trades, though fund purchases are free.
Watch out for management and maintenance fees, which tend to be higher with full-service brokers. About 4 percent of respondents said they were hit with unexpected fees. Banc of America clients reported the most, with 11 percent saying they were charged unexpected fees. The priciest brokerages might charge 1 percent or more of assets per year for actively managing your money. And the brokers charging the highest management fees also sell some of the most expensive funds, with 4 to 5 percent sales commissions, or loads.