Guest Post by : Neda Jafarzadeh
A study from NerdWallet Investing found that 17 million online investors were paying too much for their online
brokerage accounts. This huge number is due mostly to consumers blindly trusting that brand-name firms such as TD Ameritrade, E-Trade, and Schwab are well-known and expensive because they offer the highest quality experience. While there is nothing wrong with the services that each provide, here are three areas where the pricey brand-names firms don’t outshine the discount brokerages at all:
1. Increased Reliability
What you might think: A brokerage firm that is a household name is the most reliable and trustworthy place to keep your money. Anything less won’t measure up to that same standard.
What you’re actually getting: Yes, the big-name firms are trustworthy – but so are deep discounters like Interactive Brokers and others. All brokerage firms are regulated by the Securities and Exchange Commission, and certified by the Financial Industry Regulatory Authority and the Securities Investor Protection Corporation. When all houses are playing by the same rules and facing the same set of penalties, it’s a safe bet that each is as reliable as the next. If anything, a smaller, lesser-known firm has an even greater incentive to toe the line and maintain investor confidence, as they would be less likely to successfully weather any penalties or sanctions brought on by the alphabet soup of governing bodies.
2. The highest trade execution quality
What you might think: A trade that goes through with a $9.99 commission fee from E-Trade must be much faster and more reliable than a trade with a $1 commission fee from a discounted broker.
What you’re actually getting: Almost the exact same service either way – you just pay through the nose with one firm and not the other. While E-Trade’s $9.99 trades execute in an average of 0.26 seconds, versus the 0.9 seconds it takes for a $1 trade from Interactive Brokers– and that difference in speed likely isn’t worth the price difference to the average trader. In addition, often times with brokerage firms, the trade itself is being carried out by many of the same third party execution service. For example, Scottrade and TD Ameritrade use Knight, Citadel, UBS, and Citigroup to execute their trades – the exact same services that deep discounters TradeKing and Cobra Trading use.
3. Extensive resources
What you may think: Real-time market data, research reports, and analytical software are absolutely imperative to successful online trading, and nobody offers the resources that the biggest-name firms are able to.
What you’re actually getting: It’s true that information is nothing but a good thing when trading online, but there’s a limit to how helpful it can be – and most traders simply don’t need or use enough of these resources to justify the increased cost. Real-time data is really useful only for day traders – paying extra for such a service when you only make ten or so trades per month simply aren’t worth it. And if you really do want access to research software and analysis reports, up to 12 firms offer such services for cheaper than the big three of TD Ameritrade, Schwab, and E-Trade – including deep discounter Lightspeed, who offers similar resources for just $1 per trade.
By Neda Jafarzadeh, a financial analyst with NerdWallet Investing. NerdWallet Investing provides consumers with useful financial guidance, like how to roll over a 401(k).