Discount Brokers: Changes and Updates

Changes have been sweeping the world of discount and mutual fund brokers. Just a few years ago the brokers were re-trenching and, in many cases, chasing away customers they considered unprofitable. Higher fees and minimums were the order of the day. Those trends are reversed at most discount brokers, and additional changes are occurring.

One change is a stall in the growth of “aggregation accounts.” This is an account with a service that allows an investor to access all his financial accounts from one site. For example, you could log into your bank account web site and also see the details of your brokerage and mutual fund accounts, credit cards, loans, and mortgages. This service generally is provided by a third party, such as www.yodlee.com.

Many financial service companies push aggregation, whether as a service linking all your accounts through the firm’s account or as a consolidation of all financial services at one firm. Consumers have been reluctant to actually consolidate all their accounts at one firm, so some firms have signed up with aggregation services. While the very wealthy favor such services, they tend to seek the service through an independent financial advisor.

Citibank is the most prominent firm to drop such a service. Few others have added the service in recent years. Consumers interested in account aggregation can find the service at Bank of America, E*Trade, Fidelity, and Wachovia, among other firms. The web site MSN Money also offers account aggregation without providing the financial services themselves.

Perhaps the best way to get the benefits of account aggregation is through the personal finance programs Quicken and Microsoft Money. The programs have the benefit of not requiring you to maintain a particular bank or brokerage account to maintain the service. You can switch accounts as you wish and still be able to use the aggregation service.

Another change is consolidation among the brokers and fund firms. TD Waterhouse now is part of Ameritrade, forming TD Ameritrade. Smaller brokers, especially online brokers have been absorbed by other firms over the last few years. E*Trade has purchased several firms. Resisting the trend, Scottrade says that it will remain independent and also will maintain its branch office system.

The discount brokers also are borrowing the script banks used a couple of decades ago. The brokers are offering incentives to customers who open new accounts. The incentive plans change rapidly and are available for a limited time. Here are some recent examples. Schwab offered up to 50 free trades in the first 45 days for new accounts of $25,000 or more if the owner commits to making at least 50 trades annually. E*Trade offered $100 cash back for new brokerage accounts of at least $20,000. Fidelity offered 25,000 miles on United Airlines for new brokerage accounts. TD Ameritrade offered incentives such as a Treo Smartphone and 25 free trades for new accounts.

You can shop around for the best incentive deal, but I advise against it. You should hope for a long-term relationship with a discount broker. I frequently recommend that investors use a discount broker so that they can invest in mutual funds from different fund groups and have all their securities investments at one firm. You get the convenience of one telephone number and web site and one monthly statement. You focus on how to manage the investments instead of putting together different accounts to determine how your entire portfolio is invested.

Also, the incentives are being offered because investors are trading stocks more than they were in 2000-2002, and brokers want to encourage more trading. Often, the incentives are geared toward stock traders or require a minimum amount of trading. That is not the type of investing we do and is unlikely to be profitable for the investor – though it will do well for the broker.

I continue to recommend that investors focus on the major discount brokers and the brokerage arms of the major mutual fund firms. The choices are fewer now, because TD Waterhouse and Harrisdirect have merged into other firms.

The fees charged and mutual funds available are difficult to track, because they are changing rapidly. Generally, fees are dropping after increasing for several years while funds offered are increasing.

Major changes occurred at Charles Schwab. In the late 1990s and early 2000s under a new president Schwab veered from its low-cost history into mid-range fees with higher minimums and more services. Eventually founder Charles Schwab ousted the president and has returned the firm to its roots by reducing many fees and courting do-it-yourself, bargain-seeking investors.

Investors seeking a new broker at which to consolidate their accounts should know that the major mutual fund firms have brokerage subsidiaries that are not heavily advertised. Fidelity’s brokerage has the highest costs but also is the only one through which Fidelity funds can be purchased without paying a trading fee. Vanguard’s brokerage fees are not as low as its mutual fund fees. T. Rowe Price does not offer access to as many funds as the others.