Personal Wealth Management

In Part I we looked at a few areas of concern when comparing online brokers: reputation and reviews; minimum funding levels; available methods to make trades; commissions; fees.

All important and fairly obvious.

Today we will look at a few more areas to compare online brokerage firms.

Some of these may be less obvious, but I think they are also important for investors. Especially those that wish to create cost effective, well diversified investment portfolios.  

Deposits and Withdrawals

You should consider how easy it is to add money to your investment account.

Usually it is a painless and cost-free process to deposit additional funds into your account. Many firms have some or all of the following options: electronic transfers; cheques; wire transfers; deposits in kind (shares, bonds, funds, etc.).

And, more importantly, how hard it is to get your money out. Options include: cheque receipt; wire transfers; withdrawals in kind. In addition, if you have banking privileges on the account, you may have cheque writing or debit card capabilities.

Usually it is more expensive to get your money out than in depositing it. So monitor the fees.

For example, Scottrade does not charge clients for incoming wire transfers but they charge a fee of $20 for outgoing transfers. And TD Ameritrade will happily accept your account at no fee but will charge you $75 to transfer your account to another firm.

Often when selecting a broker, investors choose one that is associated with their personal bank. This seems to be the simplest way to avoid potential problems.

Assuming commissions and fees are reasonable, this should work well for most individuals.

An alternative is to set up a banking relationship with your online broker. Many traditional online brokers offer extensive personal banking services in addition to investing.

For example, E*Trade offers savings and chequing accounts with online bill payment options and bank cards. They even offer mortgages.

Product Offering

Different brokers have slightly different product offerings.

Products may include: cash equivalents; bonds; domestic and international stocks; mutual and exchange traded funds; options, futures.

Firms also may have different commission pricing for their various products as well.

Focus on the areas that you want to invest in.

For most investors, I suggest you concentrate on: cash equivalents; no-load mutual funds, exchange traded funds, domestic and international equities.

We have already reviewed cash equivalents and equities. Next week I shall offer a look at both mutual and exchange traded funds.

We will consider why these should be the core holdings in any investment portfolio when we review investment strategy.

Execution Speed

Order execution is important in two different ways.

In general, when you input an order you want it to be executed (i.e. traded) as quickly as possible and at the best available price.

This is less important if you build your portfolio slowly over time, but it is still a consideration.

If you are a day trader who relies on fast executions, this is an extremely crucial factor.

I would not recommend day trading. Day trading is more a business activity than investing for long-term growth. As such, day trading is outside the scope of my discussions.

But for those of you wishing to become day traders or just want to know how fast your trade should normally be executed, the latest metrics are usually found on each firm’s website.

For example, Charles Schwab currently executes fully 100.0% of listed shares and 99.9% of NASDAQ shares within 10 seconds. In June, 2010, TD Ameritrade executed 99.69% of all “qualified” orders within 5 seconds.

I put little faith in execution speed data.

It is one thing to execute trades quickly during periods of normal market volumes. But how fast will a trade be made during a market crash or significant movement? Metrics are less useful in predicting speeds when they truly are important.

Trading Platforms and Research Tools

Different firms have different trading platforms and analytical tools. Within an individual broker, there may be multiple platforms and tools.

For example, TD Ameritrade offers 4 online trading platforms: Web Platform; Command Center 2.0; StrategyDesk; thinkorswim.

E*Trade offers platforms in respect of: Website Trading; E*Trade MarketTrader; Power E*Trade; Options Trading; Futures Trading; International Investing; Mobile Pro.

As far as platforms and tools, I have two suggestions.

One, most investors should be fine with the basic trading platform. When comparing firms, focus on the main platform.

Even experienced investors should be satisfied using the main platform.

Two, take a test drive of the various systems and analytical tools. Most brokers offer videos or tutorials on how to use their various platforms. Some even allow potential clients to use the tools or work with the platforms using practice data.

Choose a broker with a platform that is easy to navigate. If you have difficulty entering trades or using the system, it may cost you money in the long run through errors and missed opportunities.

Of the tools, I suggest you consider firms with strong mutual and exchange traded fund screening capabilities.

I also like firms that provide detailed information relating to: research reports on asset classes, markets, industries, and individual investments; ratings and recommendations for investments; fundamental data on countries, markets, assets, industries and companies.

Education Opportunities

Whether you are just starting out as an investor or are a seasoned professional, you should always want to increase your knowledge.

For those of you beginning the process, I suggest you take advantage of the education offered by many online brokers. Some of it is excellent.

Many firms offer education centers. Learning may come through articles, videos, interactive tools, online community forums, libraries, newsletters, and so on.

Perhaps you are interested in learning about options. E*Trade offers many free videos and webinars divided into basic, intermediate, and advanced sub-topics. I expect that by the time you have completed the 49 videos, you will have a good understanding of options trading.

You might also use the research tools to learn more about the investing process. If so, look for for tools that allow you to perform technical and fundamental analysis on investments.

Tools also provide an excellent means to practice putting your investment ideas into action (without actually having to put your money on the line). I like to use investment tools to try new tactics and then follow the results over time before I actually implement them.

The Broker

In Part I, I stated that broker reputation should be considered.

I would also consider the broker’s financial situation, asset protection, and customer service.

Financial Strength

It is always prudent to verify the solvency of anyone to whom you give money. This includes banks, companies, friends, and, yes, brokerage houses.

Use Google, or other means, to ensure that the broker you select will be operating for the forseeable future. Look for articles that indicate the firm is in actual financial distress. Also, look for signs of potential problems. This may be in the form of lawsuits against the broker, reputation issues that are causing clients to leave the firm, etc.

For the most part, your assets will not be lost should the broker suddenly close down. However, there may be delays or difficulty accessing them if the broker fails. Better to minimize the risk of this by sticking with well-managed and financially solid companies.

Asset Protection

I suggest you review the broker’s security procedures.

Most brokers will have comparable and adequate systems in place. But be sure that you verify this before setting up the account. As we saw in a previous post, you do not want to wake up one day and find your assets gone.

Customer Service

Customer service is important. Firms should offer a variety of ways to obtain help and support. 1-800 telephone, email, and even fax or regular mail are options.

Check the hours of operation. Is there 24 hour support 7 days a week or are there limits? Depending on the time zone in which you reside, this may be more or less important.

Hopefully that gives you some ideas on areas in which to compare firms.

There are many good brokers out there with a wide variety of products and services. It should not be too hard to find one that is right for your needs.