Bucking current wisdom, some smaller brokers are finding out you don't have to be big to be good.
Though the same brokers dominate the online-trading market quarter after quarter, dozens and dozens of firms are out there. So with the help of our online-brokers survey, we're taking a look at five smaller brokers.
These brokers (what we're calling League B) didn't get enough responses to be rated with the eight most-used brokers, but they each made up at least 1% of the respondent pool. While that sample size doesn't allow us to be as confident of the results as with the eight most-used (so-called League A), it's big enough to give readers an idea of the brokers' performance, especially because the survey responses were pretty similar. (For more on how we decided to measure these brokers, please review our
The five smaller brokers show a wide range of performance, both among themselves and among categories. Some, such as
Brown & Co.
, a subsidiary of
, excelled in several categories, actually earning scores comparable to or above the top League A broker. But like a few of the big brokers, some League B brokers lagged in several categories.
Brown & Co. came out on top in this category, which readers deemed the most important feature in choosing an online broker. George Brown, president of Brown & Co., says part of the reason for the service's reliability is that it limits its customers to people who meet its minimum standards of investing experience, income and net worth. Those folks don't need to turn to Brown for services besides trading, so the site isn't bogged down with tools, news and research.
Ironically, Brown & Co. did have some reliability problems just as the survey was ending. At the beginning of November, it switched to a higher-capacity system that can handle 85,000 trades a day. "It wasn't our usual standard. A lot of people were unhappy," says Brown. He says the problems caused by the changeover were cleared up by Nov. 9, a week later.
Dreyfus Brokerage Services
, a unit of
, which is an affiliate of
, also did well. At firms like Dreyfus, big improvements have been made that provide a solid foundation to continue with more minor adjustments. "Improving is hard at this point," says Jeff Nachman, president of Dreyfus Brokerage. "Making sure we keep that edge is important."
Don Montanaro, president of
, a subsidiary of
Quick & Reilly
, which is owned by
, says it has built up capacity needs and has performed very well on busy days.
For others, larger problems are still being fixed.
, the online-trading division of
, has fixed some significant problems recently, which should make a difference in its reliability, says Scottsdale president Roger Riney. The number of servers dedicated to Web trading has tripled, and the turnaround time of trades has been cut.
Joe Fox, president of
Web Street Securities
, says in the past six months he's increased server capacity and improved transaction time. He says some trading delays at the open come not from technology issues but market conditions.
Execution price was rated the second-most important feature in choosing an online broker. And well it should be. While low commissions are an obvious way to save, poor executions can cost you money in a less visible way. Once again, Brown & Co. led the category, along with order confirmations, which makes an attractive one-two combination.
"Brown has provided stellar service and executions. I have
had a bad execution with them," wrote S. Ringelspaugh in the survey.
Brown at Brown & Co. says with the broker's 150 well-trained registered representatives and knowledgeable customers, orders are sent in quickly. "We just focus on execution," says Brown. The firm averaged 22,000 daily trades last week, about a third of which were placed through the Web site.
The smaller brokers often emphasize execution over a wide range of services. "We built our entire strategy on being dedicated to what this business is really about -- executing trades in a timely fashion," says Montanaro at Suretrade. According to
Suretrade performed 6,900 online trades a day on average in the third quarter.
Nachman at Dreyfus has a similar philosophy: "If you don't have very fast execution and reasonable reporting to the customer, you don't have a business." He says that Dreyfus has lost some customers to firms with lower commissions, but execution quality brings them back. Nachman says Dreyfus executes about 8,000 transactions a day, about 80% of which are placed through the Web site.
Web Street, on the bottom of the heap, defends its trade executions. "My first and foremost concern is being able to facilitate good trades," says Fox. "You're not going to sell it faster than me, and you're not going to buy it faster than me."
Small firms also tend to play up their customer service, which readers rated the fifth-most important feature in choosing an online broker. With a smaller customer base, these brokers often say they can deliver better, more personal service. (Commissions, order confirmation and ease of use ranked third, fourth and fifth, in a tie, respectively.)
ScoTTrade had the strongest customer service score for the League B brokers. "I think I made a great choice choosing ScoTTrade. The telephone support at the local office is excellent," wrote Tom Snively in his survey.
One of ScoTTrade's strengths is its 83 branches with about 180 brokers dealing with orders, says Riney. That presence lets customers develop relationships with particular brokers, even if the customers want to do most of their trading online. Scottsdale does about 9,000 to 10,000 trades a day, about 80% of which are placed through the Web site.
Brown & Co., despite its strong score, doesn't emphasize its customer service. The broker is not about handholding but, with 12 offices and a backup center, focuses on expert service for placing orders and trading issues.
But just because a firm is small, it doesn't necessarily excel at personal service. Suretrade, for example, won a
for its poor customer-service score. As it grew, the broker underestimated the number of people who would use customer service and wasn't able to ramp up quickly enough, said Peter Seed, Suretrade's marketing director at an online-brokerage conference Wednesday presented by the
Business Strategy Network
. Suretrade is focusing more on customer service, says Montanaro, the president, and has already cut telephone wait time significantly and has added more people.
: League B brokers didn't excel in mutual funds, with Suretrade winning the top score of 3.6, compared with the average score of 4.1. Brown & Co. came in last with a score of 1.9, but it plans to add a robust fund offering early in the new year. Dreyfus (2.5) is looking to add a wider array of funds next year.
: Some of the lowest commissions come from League B firms. Brown & Co., with $5 base commissions, topped the category with a score of 5.0 and won a Bull Award. Suretrade and ScoTTrade scored 4.8, with $7.95 and $7 base commissions, respectively.
Research, Tools and News
: Smaller firms didn't perform well on research or tools and news. Suretrade topped League B in both categories, with scores of 3.4 for research and 3.9 for tools and news. Brown & Co. brought up the bottom in both with scores of 1.9 and 2.6, respectively. Suretrade says it will continue to lead in tools and news while Brown says it thinks customers are better off getting their tools and research from sites or services that specialize in it. (The average score for research was 3.3 and for tools and news, 3.7.)
The technical side of this online brokers survey was conducted by
, October 1998.