The online broker industry is in the midst of a sweeping transformation, and investors like the changes, judging from their votes in IBD's eighth annual Best Online Brokers survey. And one thing's for certain: There's never been a better time to be an online investor.
Competition is growing from new, low-cost players like the microinvesting apps popular among millennial investors. So is pressure from longtime competitors that have bulked up through mergers. The result is an industry fighting to please investors so firms can thrive — or survive. Witness big brokers' mass move to zero commissions last fall.
Amid this change, IBD and polling partner TechnoMetrica Market Intelligence found that the average Customer Experience Index among firms included in the survey rose 4 percentage points from last year, to 62. And the five coveted winners of the awards for Best Online Brokers in Overall Customer Experience all showed strength in a number of areas, as reported by their customers.
"As competition for client assets intensifies, online brokerages have made significant strides in adapting to changing investor preferences and demands," said Raghavan Mayur, president of TechnoMetrica. "From eliminating trading fees to providing innovative mobile apps for investing on the go, brokers are creating a deeply richer and more satisfying experience for clients."
Based on its Customer Experience Index rating of 76, up nicely from last year's rating of 70, Fidelity reclaimed the top spot in the ranking of Best Online Brokers. Fidelity has ranked No. 1 in five of the past six years.
- View The Full Best Online Brokers Special Report
- See Lists Of The Best Online Brokers Overall And In Every Category
- Get Details On The Survey Methodology
Last year's winner, Charles Schwab was almost neck and neck with Fidelity, just 0.7 point back. Meanwhile, Tastyworks, a newcomer to the analysis known for its options trading platform, made an impressive debut at No. 3.
Rounding out the top five online brokers overall were Interactive Brokers (read more), and TD Ameritrade (read more), which were tied.
If you're thinking of switching online brokers, opening a new account or moving money from a traditional broker to an online account, the survey results offer a wealth of information to help you find the right one. Besides the best online brokers in overall experience, the survey identifies five top firms in 15 performance categories, ranging from Equity Trading Tools to Trade Ideas and Educational Resources. You thus can focus on the brokers that excel in the areas that mean the most to you.
When asked which broker attributes were most important, respondents gave the nod to brokers' Low Commissions & Fees, Website Security, Trade Reliability and Site Performance.
Best Online Brokers Survey Details
Broker rankings were based on results of Investor's Business Daily and TechnoMetrica's survey of over 4,000 brokerage clients in September to December 2019. Brokers were rated by their own clients on 15 attributes that were deemed most important in a July 2019 survey of more than 1,000 investors.
To qualify for inclusion in the analysis, at least 110 of a broker's customers had to take part in the second survey phase. Besides the five firms named Best Online Brokers overall, five other brokers were included in the study: E-Trade, TradeStation, Bank of America's Merrill Edge, Vanguard and, for the first time, Robinhood. Both Merrill Edge and Vanguard returned to the analysis after failing to qualify last year.
All of the brokers showed one or more areas of strength.
Best Online Brokers: Tastyworks Debuts At No. 3
The two survey newcomers are worth noting.
Tastyworks, mainly an options brokerage, was launched in 2017 by the founders of TD Ameritrade's Thinkorswim platform. The parent of Tastyworks is Tastytrade, an online financial content network.
Robinhood, which recently surpassed 10 million users, is a microinvesting app that caters to the millennial crowd. It's been offering free-commission stock trades since 2013. More than half of Robinhood's customers are first-time traders.
Both Tastyworks and Robinhood ranked in the five best online brokers in the two cost categories: Low Commissions & Fees and Low Cost/Free ETF Trading.
Robinhood recently announced fractional share trading, where investors with limited resources can buy a piece of high-priced stocks such as Amazon.com ($1,877 a share) or Google parent Alphabet ($1,450 a share). Charles Schwab plans to offer fractional share trading this year.
Brian Weaver has been using the Robinhood app for a little over a year. At one point, he said he had a retirement account at Fidelity but still needed $1,000 to open a brokerage account. "What made Robinhood most appealing is that you don't need a lot of money to start," he said. "If you want to start with $50, it's not a problem."
Fidelity's website says the minimum for opening a brokerage account these days is zero.
Like many other investors today, Weaver works full time. He finds Robinhood's app to be easy to use but says one drawback is a lack of research tools. "It's not easy to do technical analysis on stocks," he said.
Commission-Free Stock Trading
With major brokers' most obvious cost, commissions, going to zero, investors may place higher importance on other broker attributes.
In late September, Interactive Brokers cut commissions to zero for some customers. Soon after, Charles Schwab took the industry by surprise when it announced commission-free trades for U.S. stocks, exchange traded funds and options for all customers. TD Ameritrade, E-Trade and Fidelity quickly followed suit.
The elimination of commissions came amid the rising popularity of Robinhood and other investing apps like Stash, Acorns and Betterment. Online brokers are eager to capture the younger generation of novice traders, an increasingly important demographic.
Brokerage Industry Mergers
More industry change is coming. In November, Charles Schwab announced plans to acquire TD Ameritrade for $26 billion in an all-stock deal. The merger should close in the second half of this year. It will create a brokerage giant with more than $5 trillion in assets, serving more than 24 million clients.
To offset commission-free trading, the combined firm will be more reliant on interest income and client services. In October, Bankrate.com reported that trading revenue accounted for just 8% of Charles Schwab's total revenue in 2018, down from 15% in 2014. About a third of its revenue came from asset management, while 57% was interest income on client funds.
Analysts say E-Trade could be the next takeover target in a rapidly consolidating industry.
Categories Of Broker Performance
The IBD survey identified the five best brokerages in 15 categories. If Customer Service is important to you, it's easy to see which online brokers fared best. Active, self-directed investors, meanwhile, might be interested to know who scored well in Equity Trading Tools or Options Trading Platform.
Tastyworks was the clear leader in the options category, supplanting TD Ameritrade, which has dominated the category in recent years.
Tastyworks also scored well in categories including Trade Reliability, Site Performance, Customer Service, Trade Ideas and Educational Resources.
Fidelity's overall ranking of No. 1 was helped by strong showings in categories like Equity Trading Tools, Investment Research, Portfolio Analysis & Reports and Mobile Trading Platforms/Apps.
Chip Burke, a former bond trader, NYSE specialist and IBD reader, has been a longtime Fidelity customer.
"They've always given me good executions," Burke said. "Their mobile app is 'easy-as-pie' and dependable, and their portfolio analysis section lets me know when I might be getting too overweight in a particular sector."
Burke also dabbles in the bond market. "It's very easy to buy treasuries, but with corporate bonds, the execution isn't as good," he said.
Investor Demographics
Nearly 75% of survey respondents were experienced investors who've been investing in stocks for 10 years or longer. Twenty-two percent had portfolio sizes from $100,001 to $500,000 and another 22% boasted portfolios in excess of $1 million.
When asked how many stock buys and sales were made over the past 30 days, 26% of respondents said one to four, 25% said five to nine and 22% said 20 or more. Over the past year, 29% of respondents said they made at least 100 trades.
Meanwhile, in a highly competitive industry, the latest survey showed that investors are not hopping around every year to different online brokers. But the share who have switched has grown.
When asked if they switched primary online brokers one or more times in the past five years, 32% said yes. That compares with 18% in IBD's first survey of broker clients in 2012.
Among those who switched, 37% said the main reason was cost.
Individual stocks were by far the top choice of survey participants, with 93% owning equities. More than half (60%) own exchange traded funds and 48% mutual funds.
Stock options garnered some interest at 33%. And 9% own cryptocurrencies like Bitcoin, Ethereum and others.
Follow Ken Shreve on Twitter @IBD_KShreve for more stock market analysis and insight.
