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June 20, 2007

Shelley's Teaching Minute - Online Brokers

From January until June of 2006, Kiplinger reports that there were 3.8 million new online accounts opened.  You can’t watch TV or flip through the pages of the main stream financial press without seeing a dozen commercials for online brokers, each telling you why they are the best in the business.  Each brokerage firm tries to appeal to our senses with a little different tactic; one has the best tools, another best customer service; making the decision about which online broker to use a very difficult one.

In the Snider Method workshop we detail the 6 questions you ask when choosing an online brokerage firm.  I’ll give you a brief overview now.

1.  Can you do the type of investing you plan to do in each of your accounts?  You have to make sure the brokerage firm you go with has the infrastructure in place to handle the types of investing you will be doing. For example, let’s say you wanted to sell puts in your Tax Qualified Account.  Not all brokers will allow this.    Many do not have the built in infrastructure to handle all types of trading.  If they don’t they will either refuse to let you to do it or outsource it to a middle man.  By the way, who do you think ends up paying for the outsourcing?

2. Will my broker help me when I need help?  Let’s face it, in a lot of industries customer service is a thing of the past.  But when you are talking about your money you need to make sure that you can’t get the support and answers you need when you need them.  Some of the better online brokers not only have good phone support, they are starting to have live chat. 

3.  Is your brokerage firm’s website user friendly?  For someone who has been doing online trading for a long time and has ton of technical savvy this is not a big issue.  But a lot of people who are new to doing their own investing need the online screens to be easy to use and maneuver through.

4.  Will you have a reasonable commission structure?  And I think this begs a second question, what the hidden fees are.  I saw a commercial recently for an online broker that offered free commissions for the first year.  My question was, well, how are they going to make money?    Listen, you want to pay low commissions, but not if that means you are getting charged fees every time you sneeze.  My opinion is that you shouldn’t have an account set up fee, a your below your required minimum fee, etc, etc, etc.  I would be willing to pay a little bit more in commissions to know what I am really paying for.  I would also pay a little more in commissions to make sure I was getting the maximum amount I could from the money sitting in cash, which leads to question number 5.

5.  Does the broker have high interest rates on uninvested cash and low margin interest rates?  Make sure your broker is passing along the vast majority of what your cash is making to you.  Some brokers make more from money market spreads than they do from commissions

6.  How will my trades be executed.  If an online broker doesn’t guarantee National Best Bid or Offer on every single trade don’t invest one singe dollar with them.  Because trading is becoming so much more competitive most online brokerage firms do guarantee NBBO, but don’t assume.  Ask.

Shelley Seagler

Kim Snider Financial Communications makes no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Diversification does not protect against market losses in a declining market. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk, including possible loss of principal.

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