I thought I’d take a break from my probability series and focus on something even more essential to investing: picking a brokerage! Since I recently put in the paperwork to change to a new brokerage after a year with E*Trade, I figure now is a pretty good time.

Unless you are trading often there aren’t too many factors to consider other than fees and commissions, but there are a few. If you are trading often, you’ve come to the right place - I will happily cure you of that silly problem.

Note though that I am only considering online discount brokerages. Unfortunately I have no experience with the full-service type.

Customer Support

This is pretty important for a brokerage account because it will likely be holding a substantial amount of your money and the last thing you want when your money goes missing is a 48-hour response time only to inform you that everything is working correctly on their end. You want multiple ways to contact them, an instant response, and a response that demonstrates that they have multiple working brain cells. This is sometimes rare in many businesses, but luckily most financial companies know support is key. I’ve had experience with the support from E*Trade, Scottrade, and Banc of America (I am convinced the ‘c’ started as a typo they didn’t catch until it was too late) and found them all satisfactory, though I did like the quick and easy question form on E*Trade’s site.

Ease of Use

If you’re only logging in a few times per year to check up on things and place the occasional trade, a slick website is not a very high priority but at the same time you don’t want to have spend a few hours looking around for your account balance. Make sure their website is easy and intuitive to navigate.

Ease of use also includes the ability to easily transfer money in and out of the account. Find out what options they have for funding your account and especially what options they have for withdrawing from your account, pulling money out is almost always more difficult than putting money in. It is nice to be able to quickly transfer cash amounts between your brokerage account that pays minimal interest and a high yield savings account, so look for ways to link accounts.

Price

This is the major one, sort of. It matters because you want to keep your costs as low as possible to maximize profit, but most of the discount brokerages are pretty similar when it comes to pricing. Expect to pay something pretty close to $10 per trade for the mainstream firms. There are super discount brokerages that offer even cheaper and sometimes free trades, but they usually operate a bit differently.

The thing to really look for is their fees that they don’t advertise on the front page. Maintenance fees and penalties (for the most benign reasons) are killers if you aren’t careful. E*Trade can charge a $40 quarterly fee for not using their services. Read the fine print and don’t get caught with unnecessary fees.

- Why I changed

I originally signed up with E*Trade to take advantage of their 100 free trades for 30 days, which allowed me to build my initial position for free. They also had a slick website and neat graphing utilities (not as cool as mine of course). However, the 12-month ‘probationary’ period is over and now they want to start charging me $40 every three months I don’t make a trade. No thanks.

I opened a Scottrade account and sent in an account transfer request. I just chose Scottrade because they have a cheap $7 commission on trades and no silly fees. They are also a more mainstream brokerage that operates the same way I’m used to.

I filled out the transfer request form and, following a tip from 2million, indicated a partial transfer of assets instead of an account transfer. Instead of transfer the whole account, I wrote in the stocks I wanted to transfer which of course was all of them, but it leaves 43 cents in the account and hopefully only triggers E*Trade’s partial account transfer fee of $25 (more silly fees) rather than their full account transfer fee of $60. I will then just withdraw the 43 cents with a personal check (you didn’t think I was going to let them keep it did you?) and close the account myself. The transfer is currently pending but I will be sure to update this with whether or not it worked!

Update: E*Trade was not amused, they got their $25.

On a related note, Scottrade customers can refer new customers and both the existing and new customer get 3 free trades, so if you want to take advantage of that send me an email with your name (domain name without the www, @gmail.com) and I’ll refer you.

A word on the super discount brokerages

Aside from the mainstream discount brokerages, there are a few that offer even cheaper commissions.

Sharebuilder - They offer $4 commissions and a handy partial share purchasing program. The catch is that you can only trade on Tuesdays. This isn’t really that big of a deal for the long-term investor, but I’m picky and want to pull the trigger when I find the opportunity, not just on Tuesday.

Zecco - These guys offer free anytime trades. They claim to be supported through advertising and interest earnings so they can offer a limited number of free trades. They’re still too new and unproven for me to trust right now though.

Banc of America - They actually offer mainstream trades for free. The catch is that you need $25,000 deposited with them in a checking account that pays little to no interest. However, if you’re the type of person that can have $25k cash laying around without earning interest, trade commissions are probably not something you worry about.

Similar Posts:

• E*Trade Redefines ‘Partial’
• It Wasn’t Good Enough: Landec
• A Quick Update On CAPS And The Website
• Cost of Probability
• CAPS Experiment: Week 1
• Finance Site Roundup
• Roth IRAs vs Traditional IRAs
• Risky Probabilities
• Stuck At The Video Store Wondering What’s Good? Use Your Phone!
• If You Wouldn’t Buy It, Don’t Hold It