What we considered in picking a brokerage for our non-retirement trading – Part 2

December 12th, 2008 · No Comments

In part 1, of this series I talked about the top 6 things we’ve considered during our struggles to identify a brokerage to use for our initial investing process (as purposely opposed to trading) in our quest toward hitting our geographic independence goal. This post provides the other 7 of the the full list of 13 considerations.  Keep in mind that this means all of these were less important to us than the first 6.

Money not spent on fees is like an immediate positive return

  1. Minimum balance / annual account maintenance costs. It used to be that a number of brokers, though not all, had a minimum balance requirement for accounts.  And often associated with that was a fee for going below that balance or an annual account maintenance fee, though some firms charged the latter even though they didn’t advertise a minimum balance requirement.  Obviously, our goal here was to not have to pay any such fees.  In addition, we also wanted to look out for any inactivity fees to ensure we don’t have unexpected costs should we stop making new investments into this account for any reason.

    In our research, the number of firms charging annual maintenance fees and/or inactivity fees has almost dropped to zero.  Which is a significant change from when we opened our first IRA accounts many years ago.  I guess online competition is the driver here?  But, while we didn’t find many fees, we did find places that had minimums to open accounts.   For example, Fidelity wants $2,500 and Schwab wants $1,000.  This pretty much rules those places out since we’ll be starting from $0.

  2. Yield on cash portion of your account. The idea here is pretty much a no-brainer — we want to maximize the yield on any cash we have in our investment account.  While we may not plan to keep much cash here, there may be times when we end up with it nonetheless.  For example, we might need to sell an investment before we’ve identified a replacement.  Or more likely, we’ve got to have cash available because we’ve placed a limit order and we don’t know exactly when it will get filled.

    In our research, many of the low-transaction-cost online brokerages pay very little interest at all, which honestly isn’t too very surprising.  Even if they do pay interest, it is usually tiered and we’d need a couple to five thousand as a minimum balance to get a yield above 0.00% APY.  Contrast this to the larger, older brokerages like Fidelity where our cash would be swept into a money market fund that actually pays pretty decent interest.

    The importance of this to us really depends on two things.  First, how hard will it be for us to move money between the investment account and a higher yield savings account.  And by hard, I mean not only the effort to initiate transfers but also any time delays as a result of holds being applied before the money can be moved again.  Second, this may matter based on the availability of no-fee, fractional share, dividend and cap gains reinvestment policies.  I’ve found it’s hard to find alot of details on that sort of thing when shopping around the brokerage sites and I’m not sure if that’s because everyone does it, or because no one does it, or because it just isn’t significant to the types of customers they’re after.  Anyway, we know that the dividend reinvestment policy matters to us with this investing account, but we may just have to take an experimental approach to start.

  3. Cost of selling. While we are planning to take a buy-and-hold strategy with this new account, there will still be times when we might have to sell an investment.  For example, if we hit a stop loss level, or when the dividend has been cut, etc.   Likewise, if we decide we don’t like this particular broker and want to move our investments somewhere else, this may be the cheapest way to move our money (as opposed to actually transferring held shares which typically involves its own fee.)  As a result, we should pay some attention to these costs.

    In this category, brokerages that are symmetrical in fees for buying and selling have the advantage.  For example, Sogotrade is only $3 to both buy and sell whereas ShareBuilder would cost $3 to buy but $7.46 to sell (all figures after the Costco 25% fee rebate.)

  4. Quality of the web interface and availability of tools. After a bit of thought on this, what’s important to us is that there be good features for seeing the historical growth and transactions done in the account.  Ideally, some way to pull out dividend, interest, and paid out cap gains over a period of time and shown as a yield separately from the unrealized cap gains.  Only secondarily do we need easily-digested, quality information for researching stocks and ETFs — this is because, for the type of investing we’ll be doing something like Google Finance will likely work just fine.  Note that just because some sites focus their marketing of the interface on features for active traders doesn’t mean that they don’t excel on our desired features too.

    In general, we’re finding that very few sites except ShareBuilder really try to market to the type of investing we’re thinking of doing.   One nice thing is that brokerages without minimums will allow you to create an account and explore their user interface without putting any money at risk, or even taking the time to transfer it.   For example, we’ve done this with Zecco and TradeKing. This way you don’t have to go by just their marketing — you can actually explore the screens and features available.

  5. 24/365 customer support. We’re fairly uneducated regarding the investing world, so being able to call and ask questions, or e-mail and get an immediate response are really quite nice features to have.  After all, we’ve got active jobs during the day so most of our financial learning, order placement, and account updates will be happening during non-business hours.  As an example of when this comes in handy I’ll point out that I’ve actually called Fidelity twice in the past 3 months at around 3 am in order to make IRA account feature requests.

    In addition, we’re particularly sensitive to having service people that aren’t script-driven, non-English-speaking foreigners.  Another real-world experience might help illustrate.  Recently, while looking at high-yield savings and checking account options, I e-mailed ETrade to ask about integration with Quicken.  The response I got was effectively “We can’t answer this due to security reasons.  Please logon to your account and re-send through secure e-mail.”   It was clear to me that the person either didn’t read the question, or didn’t speak English well enough to understand that I was saying I was trying to figure this out prior to opening an account.

  6. Execution speed and quality. Trade execution refers to the actual completion of a trading instruction between real world buyers and sellers.  It is important to note that this is different from us clicking the Submit button to request a trade.  There is always a delay as the trading request gets transmitted somewhere where it will get matched up at a price and quantity with an opposite party.  So, what we’re looking at here would generally be the time it takes to fill a market order since that’s where price fluctuations over time could effect us.  Or the time it takes our broker to notice a stop order’s price has hit and get executed.

    But after a bit of thought, because we’re thinking we’ll be using this account for executing a buy-and-hold strategy, we’ve realized that we’ll rarely be using market or stop orders so we’re not too concerned with this aspect.  Instead we’ll be mostly making limit purchase orders where the only risk is that our order doesn’t get filled at all.  If it does get filled, it will be at the price we set or better.

  7. Availability of options trading. There are a number of trading strategies that are designed to generate income in all types of markets and a number of these rely on options trading to work.  However, for two reasons, this is not an immediate requirement for our new brokerage account.  First, we don’t yet have a large enough portfolio that we’re willing to take on the risks of trading options.  We can’t even sell covered calls because we can’t accumulate enough shares to fill a single option should it get exercised by the purchaser.   Second, we’re still learning about these strategies and thus it would be pretty risky to put any of our portfolio into something like this, even more so considering doing so would likely require a significant portion of this portfolio for quite awhile.

    All that being said, at some point we do plan to utilize one or more options trading strategies so a brokerage that allows options trading and provides the tools to do so would be a nice extra.

Well, this post has gotten longer than I expected (that seems to happen quite a bit to me, hmm) so I’m sorry to do it, but I’m going to delay the summary of our brokerage pick for a later post.

EDIT: I’ve now posted a summary of our actual brokerage decision and associated cash flow plan for 2009.

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