Who Are 2019’s Best Online Brokers?

Online discount brokerage firms are happy to accommodate. They provide mobile apps that let customers monitor, analyze, and trade, often with the same speed, ease, and completeness as a desktop, and with complete interoperability. Live video and television feeds are now ubiquitous on desktop and mobile. A few brokerage firms have even begun to furnish information and research via Alexa and Siri. One,
TD Ameritrade Holding

(ticker: AMTD), recently added the ability to trade through Amazon Echo.

Being plugged into a rich trading platform through a variety of devices anywhere and anytime is only one of the ways that brokerage firms are offering more and better tools of the trade. Here are five watchwords that capture what we believe online brokerage firms should provide their clientele in 2019: personalization, accessibility, convenience, thoroughness, and sophistication. Collectively, you can think of these traits as PACTS.

“We’re finally at the expect-everything stage,” says Ed Andersen, vice president of mobile at
E*Trade Financial

(ETFC). Andersen was referring specifically to mobile, but he could have just as well be talking about customers’ approach to online brokerage firms in general.

Advanced technology is key. This past year, major online brokerage houses invested heavily in their own systems and partnered with others. Among other innovations, this will enable more advanced use of artificial intelligence, data mining, and machine learning. This trend will only grow in the future.

That’s to investors’ benefit. This arena of near-constant innovation creates an environment where all but a few online brokerage firms are more than adequate, and the top ones truly excel.

This is Barron’s 24th annual ranking of The Best Online Brokers, although it’s the first by this author. With a new face—however wrinkled—comes a slightly different sensibility. (See box on page 22 for a description of the methodology). In this revised version, we’ve tried to reflect more of the needs of mainstream investors with a little less weight given to technological breakthroughs for extremely active traders. What we’ve found in our research over the last couple months is that once middle-of-the road brokers are now providing more sophistication, and that cutting-edge, active trading firms are increasingly trying to offer more help to savers and longer-term investors. We think it’s vital for online brokerage firms to provide tools that make it easier for the more occasional trader to be better informed. As a result, we’ve put a little less emphasis on highly complex options strategies.

That said, the breadth and depth of today’s offerings from top firms mean that many of 2019’s top performers are familiar names.
Interactive Brokers Group

(IBKR) and Fidelity repeat their one, two finish of a year ago. Both earn 4 1/2 stars. E*Trade enjoys the biggest gain this year, up from seventh in 2018 to No. 3, with 4 stars. Another four-star selection, TD Ameritrade, placed fourth this year, down one spot from 2018. Merrill Edge, also notching 4 stars, rounded out our top five, gaining one position from 2018.

This year, Barron’s reviewed 14 online discount brokerage firms. Two others—Vanguard and Firstrade—declined to participate.

The good news is that a majority of the online brokerage firms reviewed boast of major improvements to their sites over the past 12 months. And the few that don’t say they’re working on it.

TradingBlock, a no-frills brokerage firm that doesn’t even have a mobile app, for example, plans to launch an entirely new platform later this year, combining its three current web properties into a brand-new design. “We’re targeting to take the online brokerage space to a different place than what we see is available right now,” says Tom Heffernan, the firm’s vice president of marketing. He believes the new platform will be able to more effectively deliver information to, and interact with, individual account holders than what’s possible in the market today.

Personalization and customization are where much of the differentiation is taking place. More investors and traders demand the ability to curate not only investment basics such as watchlists and screens, but what shows up on the launch page, what kind of news they receive, and how to place orders.

Active trading platforms have tended to lead the way toward an ability to customize, but mainstream, web-based sites are coming on strongly. On its desktop site, TD Ameritrade, for example, provides a dock with the ability to add various modules such as streaming quotes of individual stocks. This is an easy way to add information needed—watchlists or streaming quotes, for example—while giving the user an ability to remove what’s merely a distraction. It can be ordered in such a way that those modules used the most appear before those that are used less, sort of like adding icons to a mobile home screen.

E*Trade, Interactive Brokers, tastyworks, Merrill Edge, and Fidelity all now offer highly customizable mobile apps.

Ease of use is another must. This includes the ability to trade off charts as well as much easier toggling from one function to another. Extended-hours trading is becoming more and more commonplace. A year ago, both E*Trade and TD Ameritrade began offering exchange-traded funds trading pretty much around the clock.

Virtually regardless of the broker, trading speed keeps accelerating. The two-year-old new kid on the block, tastyworks, says its trade execution is a blazing 25 to 50 milliseconds. TradeStation in December averaged 60 milliseconds. A blink of an eye is estimated to take 300-400 milliseconds. TradeStation says a reasonable assumption would be that execution times generally have been cut roughly in half over the last five years.

The ability to execute trades so quickly means nothing unless it results in price improvement. That’s what most online brokerages now emphasize. Some brokerage firms report more than 99% of their trades had price improvement last year. Fidelity alone said it logged $637 million in price improvement in 2018, money that goes back into the pockets of its customers.

Still, costs remain tricky terrain for investors to navigate. Be aware that what a brokerage firm charges for a trade isn’t the entire story.

In years past, many brokerage firms lowered commissions and fees, as well as added to their stable of commission-free ETFs and mutual funds. TD Ameritrade, for instance, now offers more than 300 commission-free ETFs.

Robinhood, a trading app that isn’t reviewed in this survey, introduced a commission-free platform app a few years back and millions of small investors flocked to the site. Robinhood, however, generates some of its revenue through what is known as “payment for order flow,” that is compensation received for placing execution orders through third parties. In a statement Robinhood co-founder Vlad Tenev, said the situation “isn’t unique to Robinhood” and a number of online brokers also get paid for order flow. He added: “To ensure we have a fair system, we don’t take rebates into consideration when we choose which market maker will execute your orders. Also, all market makers with whom we work have the same rebate rate. We send your orders to the market maker that’s most likely to give…the best execution quality. For even finer control, we offer limit orders and stop limits, which allow [customers to] name [their] own price They note that “Traditional per-share rebates do not make sense for Robinhood’s executing venues since the number of shares Robinhood’s customers transact per dollar is higher than on other platforms,” and that “any rebates Robinhood receives do not adversely impact this best execution obligation.”

Generally speaking, however, the more order flow that a brokerage firm pockets, the less price improvement a customer can expect. Brokerage firms vary on order flow. Fidelity and Interactive Brokers say they don’t accept any money for order flow.

Tastyworks and Interactive Brokers have emerged as the low-cost leaders. Interactive Brokers offers a tiered pricing structure that reduces the average cost per trade considerably. Tastyworks, whose domain is overwhelmingly options and futures, charges a flat $10 for a contracts-related trade, regardless of how many contracts are involved. Tastyworks charges only to open an options trade, never to close one.

On the occasional traders’ side, Merrill Edge now offers 100 commission-free equity trades per month for those clients who hold at least $100,000 in assets. According to Cory Triolo, head of Merrill Edge’s digital-client experience, some 76% of Merrill Edge trades in equities and ETFs are now commission-free.

That stands in stark contrast to Merrill Edge’s industry-lagging $6.95 per trade. According to the Broker Monitor service of the consulting firm Corporate Insight, the average online commission rate among leading online brokers last year was $5.95, which is about a 27% decrease over the past five years. One measure of how far down commissions have come: The winner of Barron’s inaugural online broker ranking in 1996, Lombard Institutional Brokerage, charged an average of $34 a trade.

“Price compression” emerged as a big trend in 2018, according to Michael Ellison, Corporate Insight’s president. This past year major brokerage firms focused on “reducing expense ratios and lowering account minimums,” Ellison says. Fidelity, for example, initiated a no-minimum account policy.

Daily Average Revenue Trades, or DARTs, are the common metric the industry uses to measure revenue-producing trade commissions and fees. DARTs are down year on year for some firms, according to Corporate Insight. Merrill Edge, for one, showed a sharp dip in December.

Still, “in recent years, major brokerages have steadily moved from a commission-driven model to a fee-based model,” Ellison notes. As a result, he says: “the increase in fee-based revenue is more than making up for declining DARTs. Additionally, the custody businesses of TD Ameritrade,
[Charles] Schwab

[SCHW], Fidelity, and now E*Trade provide those firms further protection from declining commissions.”

Commission rates among the major brokerage firms remained flat in the last year, Ellison says. But that doesn’t mean firms have stopped competing on price. “Instead of continuing to slash commissions, we’ve seen a trend of firms building out their [no-transaction fee] and commission-free ETF and mutual fund offerings in the last 12 months,” he says, pointing to Fidelity, which last August launched the industry’s first no-fee index mutual fund and then introduced two additional zero-expense ratio index funds a month later.

“With trade commissions at historic lows and the longer-term trend of asset flows increasingly moving toward passive funds, we expect to see firms continue expanding the breadth of their commission-free fund menus,” Ellison says.

Security is another issue that is front and center in the minds of the investing public. Brokerage firms are responding, with multifactor authentication and fingerprint recognition. Some now offer facial recognition on the iPhone X.

Online brokerage firms are embracing artificial intelligence and machine learning to give customers both ease and personalization.

TradeStation, for example, is now working on using AI to create what it calls “personalized customer journeys.” Imagine your broker sending alerts by analyzing your portfolio, watchlists, and searches. Or, it determines that you usually check your portfolio at 4:13 p.m. on weekdays so it pushes out a notification about that time each day.

And Alexa? After activating a TD Ameritrade account and providing a voice pin, we put the young bot through her paces. Alexa was pleasantly responsive to our commands, providing everything from the latest price quote of “International Business Machines” to an account update. We stopped short of making a trade, not quite ready to trust her with our money.

Alexa may be one way to remove some of the stress of keeping up with the markets. Then again…