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No. of Recommendations: 25
Freetrade Alternatives—Browser-Based Brokers

With the impending demise of our beloved Freetrade, I have been looking for a Freetrade-like broker that would allow Fool investors to trade at the lowest possible cost. I have spent many hours reading websites of various brokers, trying to determine the commissions and miscellaneous fees, as well as various nuisances of each, in order to make an informed decision, based on comparable features of the various brokers. As you know, there are many, many brokers, each with different good and bad points. Whether a particular broker is “good” for you, depends on various factors, including your investing knowledge and sophistication, trading style, trading requirements, knowledge and comfort with computers and the internet, and many other factors. A broker good for me may be bad for you, so this entire discussion has to be viewed in light of your needs and wants.

In my research, I've used my particular circumstances as the background. I think my background fits many Fool investors who were using Freetrade as their broker. In that light, I reviewed the various brokers from the viewpoint of a user who is an investor rather than an active trader, but an investor who makes trades each month, as opposed to an investor who makes only occasional trades. In my case, Freetrade was wonderful, since for most months I traded 20 or fewer times, with an average of 10-25 trades per month, with many of the trades being trades of 100 or fewer shares, utilizing the “buy in thirds” approach. With no commissions I could buy small amounts of shares of many companies, without trading costs being a factor, enabling me to diversify my portfolio with many good companies. Moreover, during the last couple of years since I began investing on a serious basis, I never talked to a live broker when I traded with the regional brokerage firm I used before transferring the bulk of my account to Freetrade last year.

In my case I seldom trade on margin, so margin rates are not as important to me. I also trade equities only, including some ETFs in lieu of mutual funds. I do not trade in options, futures, currency transactions, foreign transactions, or other more-sophisticated trading styles. Therefore, the costs of these types of trading were not a significant issue for me in reviewing brokers. So to summarize, in my review I emphasized an investor with a limited number of stock trades each month, generally in 100 or fewer share lots, usually not on margin, with no options, futures, or other types of trades. I also emphasized an investor who trades online, with no help from a live broker, and who is comfortable making his or her own investment decisions (of course with the help of the Fool Community).

My broker review was helped by the recent March 7, 2005 Barron's article with its annual ranking of the best online brokers. I'll refer to that article in my discussion below. Subscribers can find the Barron's article on its website at http://online.barrons.com/article/SB111000331141771314.html . While the Barron's rankings were of interest to me, I must emphasize that the Barron's review was based on many factors, while my review was based predominantly on the lowest commission costs and miscellaneous fees. I also reviewed the 2005 annual broker survey of the American Association of Individual Investors. The survey is available to members and nonmembers alike at http://www.aaii.com/promo/20050328/dbguide/brokers.pdf. Again, the AAII looked at all factors relating to the brokers being reviewed, with the discussion generally being aimed at the occasional investor. For the 2004 discount broker ratings from Smartmoney, see http://www.smartmoney.com/brokers/index.cfm?story=2004-discount-table. Other broker surveys can be found at http://www.keynote.com/solutions/performance_indices/broker_index/broker_trading.html.

I think it is good to review brokers based on a breakdown used by Barron's, which splits its rankings between brokers that generally provide internet browser-based services and brokers that generally provide software-based services. Barron's thought that investors planning to do basic trading, with a limited number of trades each month, would be best to look for browser-based brokers---deemed “SUVs” by Barron's, with easy to use features, basic research, and access through any computer with internet access. Barron's thought that investors planning to trade actively, with a good number of trades each month, would be best to look for software-based brokers—deemed “sports cars” by Barron's, with more complex trading platforms to trade all types of securities, whether equities, bonds, options, futures, etc., frequently.

For browser-based brokers, Barron's ranked optionsXpress as its winner, like it did for 2004 and 2003. The margin of victory for optionsXpress was fairly wide, with Ameritrade (Apex) and Fidelity being distant runner-ups. BrownCo. was ranked 11th, with Scottrade, Firstrade, and Freetrade ranked 13, 14, and 16, respectively, out of a total survey of 18 browser-based brokers. The new iZone by Ameritrade did not exist at the time of the Barron's survey.

Despite the glowing Barron's review of optionsXpress, its base commission of $9.95 a trade puts it down the rankings if you are looking primarily for the lowest commission costs. In that regard, Scotttrade at $7 per trade, Firstrade at $6.95 per trade, and BrownCo. at $5 per market order and $10 per limit order, provide a lower commission cost. Note I'm not including Foliofn or Sharebuilder, which may have lower costs per trade, but much greater restrictions on trading than the other browser-based brokers. New investors with limited resources may want to view the Foliofn and Sharebuilder websites to determine if those forms of investing may benefit them, in addition to reviewing the low commission brokers noted above.

At this point in time with my on-going review of brokers, if I were to favor a browser-based broker, my current inclination would be to stay with iZone by Ameritrade after conversion of my Freetrade account. Its $5 per trade commission, whether market or limit order, beats BrownCo., Firstrade, and Scottrade, if you're looking purely at the costs of a trade. Moreover, the iZone setup will be virtually identical to the Freetrade setup on the website, other than having to pay the $5 commission per trade in exchange for the only real additional benefit I saw in iZone of real-time quotes. At the $5 level, iZone will be hard to beat by other browser-based brokers, unless they lower their commission structures. I think $5 trades will become the norm for the deep discount online brokers, and I wouldn't be surprised to see others joining iZone at the $5 level for basic trading. As we well know, however, the brokers can raise or lower their commission structure at any time, usually without a great deal of advance notice.

In my opinion investors can't go wrong with BrowneCo., Firstrade, Scottrade, or the new iZone by Ameritrade, for lower cost trading with browser-based brokers. For investors who need the personal contact, Scottrade, with its 228 branch offices, provides a good combination of lower cost trading along with some other services, but short of the full-service brokers (with significantly higher brokerage commissions). BrowneCo. has an excellent reputation, but requires a significantly higher minimum ($15,000) and investing experience requirement (5 years). For new investors, less-sophisticated investors, investors with more limited portfolios, or investors who just feel the need to have someone to talk to about their investments if needed, I believe these investors can benefit from brokers that provide more than just low cost trading. For these investors I wouldn't advise them going any further in their broker review; instead they should review the brokers mentioned above and those at the top of the various surveys, review their websites, visit a local office for those brokers with offices in the area, and do searches of the Fool boards and other discussion boards to see how other investors have rated their experiences with these brokers. For other investors, however, there are other alternatives to consider.

Again, from a lowest cost viewpoint, iZone to me is the current leader among browser-based brokers (after the demise of Freetrade), if you are looking at brokers strictly from the viewpoint of getting the lowest price per trade, the viewpoint which was most important for those Fools like me who were attracted to Freetrade. Can $5 trades from iZone be beaten? Based on my review, the answer is NO for browser-based brokers, but YES for software-based brokers, which will be the subject of my next installment.

Raleigh1208

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