Best Online Brokers for Fund Investors

When Dave Nasser had his account at TD Waterhouse, one rule really got him miffed: To get that day's price on a no-load mutual fund, you needed to place your order by 2 p.m. He switched back to Schwab, where for most funds the order time is 4 p.m. Meanwhile, Joe Raby is thinking of moving accounts from Schwab because of the high fees it imposes when he sells a mutual fund within six months of buying it.

Seemingly minor rules like these matter much more to investors who buy mutual funds through their online brokers than whether a broker offers, say, 800 funds vs. 900.

To identify the best online brokers for mutual fund investing, I focused on these meaningful details, along with factors like fund selection.

The What Works assessment: E*Trade is best overall among the seven biggest brokers. Its fund selection, while not the best, is strong and well displayed. Its prices are competitive and its fee structures are simple. Schwab and Fidelity, true to form, offer great selection but are expensive. Waterhouse also has a terrific selection, but some customer-unfriendly features disappoint. DLJdirect's roster is fine, except it's only displayed to account holders, and its fees are steeper than E*Trade's. Datek's got low fees, but otherwise offers fund investors no appeal. And Ameritrade is the only broker of the seven I reviewed that doesn't offer NTF or "no transaction fee" funds -- no-load funds you can buy or sell without paying the online broker a fee.

How Online Brokers Fare on Mutual Funds
	Ameritrade	Datek	DLJdirect	E*Trade	Fidelity	Schwab	TD Waterhouse
Selection*	0 NTF 2,500 TF 6,500 load	196 NTF 581 TF 2,907 load	939 NTF 2,177 TF 8,066 load	1170 NTF 5,200 overall	1,100 NTF 1,300 TF 2,600 load	1,950 NTF 1,075 TF 420 load	1,421 NTF 1,044 TF 7,965 load
How are funds displayed?	customers only	customers only	customers only	list available to all	list available to all	list available to all	fund family info available to all, but not list of funds
Does broker offer top-8 hot families?**	not Fidelity Group	not Fidelity Group, Vanguard or Oak Assoc.	not Oak Assoc.	not Fidelity Group or Oak Assoc.	all 8	all 8	all 8
Transaction fees***	$18	$9.99	$35	$24.95	$75	$35 or % of principal, whichever is greater****	$24
Short-term trading time/fee*****	none	none	6 months/$35	30 days/$24.95	180 days/$75, except Fidelity funds	180 days/$39 or 0.75% of principal, whichever is greater****	no specific rule but may review account and impose fees
Purchase time******	market close	market close	market close	market close	market close	market close	2 p.m. no-loads; 4 p.m. loads
* NTF = no transaction fee; TF = transaction fee; load = sales charge ** American Century, Fidelity Group, Firsthand, Invesco, Janus, Oak Assoc., T. Rowe Price, Vanguard *** Fees for basic purchase/sale online **** Fees capped at a certain point ***** Applies to ntf funds, online transactions ****** May be exceptions based on fund family rules Source: Broker spokespeople and Web sites

Methodology

I focused on the seven biggest brokers by assets and number of accounts, according to a November report by Salomon Smith Barney. These seven are also the brokers we receive the most info on from readers in our online broker surveys. If you think other brokers beat these in mutual funds, let me know.

There are a few features you won't see in this analysis. At the end of this article, you'll see what was left out of the assessment.

Fund Selection

Brokers love to brag about how many mutual funds they offer: 1,400, 5,200, 11,000. But really, how funds many does one person need? Five, 10, maybe just one? So while I looked at these numbers, I paid more attention to which fund families the brokers offered, and how they displayed their inventory to nonaccount holders -- the Web public who might be trying to choose a broker.

Ian McDonald, our Fund Junkie columnist, helped me focus on eight no-load fund families. The first six are the biggest no-load fund firms and the last two are ones that have attracted the most cash from investors lately: Fidelity Group, Vanguard, Janus, T. Rowe Price, American Century, Invesco, Oak Associates and Firsthand. (Some online brokers offer Fidelity Advisor funds. I didn't give credit, because those are more expensive funds you can buy only through someone giving you investing advice.)

Three brokers, Waterhouse, Schwab and Fidelity, offer funds from all eight. E*Trade, otherwise our top choice, doesn't offer Fido or Oak funds (e.g. (POGSX Quote)Pin Oak, (WOGSX Quote)White Oak). If you want to buy those funds through your broker, E*Trade isn't the firm for you.

As for display, inexplicably, some brokers let only account holders see the funds they offer, even if the broker has a decent selection! It's like throwing a curtain over the cereal aisle in the supermarket and charging for a peek. Schwab, Fido and E*Trade sensibly show the online public what funds they offer and break out which carry no transaction fee. (E*Trade wouldn't say, on its site or to me, exactly how many of its funds are NTF. I recruited colleague Mark Martinez to count, and came up with roughly 1,170 -- not a number to be ashamed of. Why E*Trade wasn't more forthcoming is a mystery, and a disservice to its customers.)

Waterhouse, which has a wide fund selection, shows the public only the fund families it carries. That means the very fund you want they might not have. You need to call the 800 number displayed on the page to ask about an individual fund.

I have to fault Datek and Ameritrade on both selection and display. Datek offers only 196 no-transaction-fee funds, and they don't offer Fido, Vanguard or Oak Associates. Display is for customers only. Plus, underselling what slim offerings they do have, Datek's lousy AskJeeves customer service Q&A technology doesn't even reveal that the broker indeed has some NTF funds. Says spokesman Michael Dunn: "The big demand that I get from our customers are equity trading products. That's our focus. Those products have taken precedence."

As for Ameritrade, it doesn't offer any NTF funds. The funds it does have are behind the account curtain.

Fees

Two main fees matter here, fees to buy or sell a fund, and fees for trading a fund short term. The buy/sell fees, so-called transaction fees, don't apply to NTF funds or to load funds. With the latter, a percentage of your purchase price, usually around 5% or 6% for a stock fund, goes to a third-party adviser or broker. The transaction fees only apply to no-load or so-called low load funds that are not part of the online broker's NTF program. Vanguard funds, for example, are generally transaction fee funds at the online brokers that sell them.

Transaction fees for online purchases at these brokers ranged from $9.99 at Datek to $75 at Fidelity to potentially even more at Schwab. Schwab calculates the fee based on a percentage of the transaction amount, with a $35 minimum and $149 maximum. Schwab and Fidelity are both expensive on the face, but Schwab should make life easier for its customers with a flat fee.

Short-term trading fees are an issue only for folks who move in and out of funds often. (Some fund families have their own short-term fees, which the brokers pass on, but that's separate from the broker's own fee structure.)

Short-term fees kick in if you buy and sell an NTF fund too quickly for a broker's tastes. For Schwab and DLJdirect, that's within six months. E*Trade allows a more reasonable 30 days. For Datek and Ameritrade, it's even better: no fee.

Waterhouse doesn't have a charge, but its rules are worse. The firm "reserve[s] the right" to review your account and impose fees if it sees active trading. How active is too active? Trading in the double digits over a six-month period will attract attention, says spokeswoman Melissa Fox. A clear rule would surely be preferable to a nastygram after the event.

Timing of Purchases and Updates

Here's something weird: Most mutual fund families will accept a fund order up until the market close to get that night's price. But some fund firms have different times on certain funds, like 2 p.m. So most brokers accept fund orders until the market close on all funds except those few with the special rules. Waterhouse, however, erred with the minority, and made all no-load fund orders due at 2 p.m. That's putting their ease ahead of the customers' options.

So that's the What Works assessment. Agree, disagree? As always, I want to know. Please email me with your full name, at [e-mail].

Last, here's a look at some of the factors I didn't take into account for this What Works. Want us to probe deeper into these matters? You know the drill: Drop us an email.

Fund screening/research tools. Though some brokers sport strong tools, tools are a separate evaluation altogether. Also, with so many excellent fund research sites out there, investors don't need to rely on their brokers for this service anyway.

Account statements. The convenience of having fund information on a brokerage account statement is a key reason people buy funds through brokers instead of fund companies. But a thorough comparison of statements is best left for a later article.

Brokers' own fund families. Some brokers, like E*Trade, Schwab and Waterhouse, boast their own funds. Their funds may be fine, but that's a call for our funds reporters, Catherine Valenti, Lee Barney, K.C. Swanson and Ian McDonald, to make.

Exchange-traded funds, which really trade as stocks.

Finally, the choices here are not necessarily my favorite brokers overall. I'm specifically talking funds today. If you're hungry for more, check out our overall analysis.