Smart Investor: online brokers compared

Smart Investor, October 2009

There has never been greater choice for consumers wanting an online broker than there is today. The data provider Infochoice now tracks data from 17 different providers who make trading as simple as logging on and keying in an order – no phone call, no real broker relationship required.

And in fact, the choice is bigger than even that range of providers suggests. That’s because over the years more and more providers have decided there’s room for two or even three offerings each: one doing the basics, one with lots of bells and whistles for the professionals, and perhaps a version in between for the day trader. So it is that E*Trad runs its standard platform, a Pro model and a Frequent Trader Discount fee that is different again. NAB OnLine Trading has casual, premium and professional versions. In fact, it’s getting pretty rare to find providers who only have one platform on offer.

What’s the difference? Let’s take a look at E*Trade. The basic E*Trade package has everything you really need – access to research, stop loss orders, and the ability to trade options, warrants and managed funds, among other things. But E*Trade Pro offers real-time market information, a more customisable display, and more charting options. The E*Trade model is that by trading often enough on the basic version (10 times a month) you get access to the Pro system too.

Similarly at NAB Capital, the Casual platform offers access to basic tools, company profiles, live quotes and email trade confirmations; the premium package brings access to trading tools such as live data, analyst reports, charting facilities and SMS trade confirmations; and a professional version gives still more trading tools such as streaming dynamic data, advanced charting, integrated portfolio services and analyst recommendations. As with E*Trade, the service fee for these more specialist platforms is waived if you trade enough; you only need two trades a month to avoid the $9.95 monthly fee on the premium service, but must trade at least 15 times a month to avoid the $77 monthly fee on the professional model. On many platforms, the brokerage costs come down with frequent trading too.

This trend means that in truth there are about 30 options to choose from for the investor wanting to get started with online broking. Picking the right one depends partly on what sort of trader you are: most people aren’t watching the market like a hawk, waiting for exactly the right moment to pounce; they might look at the markets at the end of the day and then decide what they want to do and put an order in to be carried out the following day. For this sort of trader, the basic version will probably suffice – and that’s what’s covered in the main table from Infochoice, attached.

Differentiating between them is tricky and comes down to things like cost, availability and quality of research, the types of securities you can trade, and the ability to set conditional orders like stop losses, which we’ll discuss more below.

Generally speaking, online brokers have been raising the bar considerably over the years – that’s competition for you – and providers are frequently revamping their existing platforms. The most topical example is Macquarie, whose Macquarie DirecTrade product has been in widespread use for several years and is now being replaced by a new online trading platform, Macquarie Edge, launched at the end of August. (Macquarie DirecTrade clients will be migrated to this new platform between now and the first half of next year. Incidentally this is the reason Macquarie does not appear in the main Infochoice table.)

Macquarie Edge features the usual array of services – news and analyst commentary, company profiles and financials, access to a range of products, charting tools – with access to Macquarie’s own research and one other distinctive feature: a community function, inspired by the rise of social networking in Australia. This allows you to “engage with a group of trusted contacts to discuss market and stock insights and view trading activity,” says Macquarie. In truth one can do this perfect well with whatever method of communication you normally use, be it Facebook, the email or the phone, but the function is an example of the ways online providers are trying to differentiate themselves from one another in an increasingly competitive market.

Macquarie also allows you to link to a cash account in order to continue to earn interest when you’re not invested. Generally, the online accounts linked to the banks tend to have versions that work better for those who already have accounts there: for example, Westpac Broking has an Integrated Accounts version which receives interest and brings preferential brokerage rates, as well as giving access to the BT margin lending product range. Many investors like the transparency and ease of having all their money in one set of linked accounts so for people who already have cash accounts and are thinking of opening an online trading account, it’s worth starting by looking at what your existing bank offers and how it all links up.

Let’s look in more detail at some of those areas where there is divergence in the type and quality of service you get.

One important one is the stop loss: the ability to tell your broker to bail out of a stock if it falls by a certain amount. (See the article on page xx for more on how to use stop losses, and the various types of trade involved.) This gives peace of mind – you don’t have to keep your eye on a share price the whole time – and is increasingly a recommended component of any investment strategy. According to Infochoice, providers who offer these include AmscotOnline, E*Trade, Bell Direct, CommSec, St George directshares, Morrison, Interactive Brokers, NAB, OneTrade, Suncorp and Westpac; those that don’t are Easy Street EasyBroking, Macquarie DirecTrade (although the new Edge product will), BankWest, CMC, Goldman Sachs JB Were and NetWealth.

Another area of difference is the securities you can trade: some providers (like E*Trade, Macquarie, CMC, CommSec, St George, Morrison, Interactive Brokers, NAB, NetWealth, Suncorp and Westpac) allow you to buy and sell ASX exchange-traded options, while the others do not. Most allow you to trade ASX warrants, although a handful, including one Morrison platform, Interactive Brokers and (for endowment warrants) EasyStreet do not, according to InfoChoice. Rarer are services that allow you to trade world markets as well as Australian ones: some that do are Macquarie, CommSec, St George and Interactive Brokers.

Other areas that distinguish one provider from another include access to managed funds and floats. Very few offer access to futures, with Macquarie, Morrison and Interactive Brokers products exceptions. Some products allow for online margin trading, typically by linking into a separate margin account; this is naturally common with platforms launched by the banks.

The arrival of contracts for difference (CFDs) in this country has had an impact on the online broking industry too. CMC Markets, for example, is one of the most powerful CFD groups in the country, but it can also be used as a straightforward online broker using CMC Markets Stockbroking. This offers access to shares, options, warrants and managed funds like many mainstream competitors, but also CFDs. This has a number of effects: it allows you to go short, which means making money from a falling market; it means you can hedge your portfolio against volatile markets; and it also gives you access to global markets, since CMC Markets offers CFDs on over 3,000 products including all major stocks and stock market indices in the US, UK and Asia, without having to open a separate overseas account. In addition, it’s another way of using leverage and margin trading without going through the usual banks. In the other direction, some mainstream online brokers, like CommSec, allow you to trade ASX CFDs.

If you’re a chartist, you’ll find the availability of tools to help you varies quite widely from platform to platform. The majority allow you to do candlestick charting – bars illustrating the highs and lows, and the opening and closing prices, of a security in the course of a day – and some allow you to export charting data into another program. Chartists tend to be quite personal in their aesthetic preferences so it’s hard to call a leader in this field; most of the providers have free demos that will give you a sense of what can be done (the only ones that don’t offer charting are Easybroking, OneTrade Basic and NAB Online Trading, although if you upgrade to one of NAB’s more frequent trader models you do get charting tools). Be aware, though, that none of them are going to offer quite the range of facilities that a specialist technical charting programme like Bullcharts will. If charting and technical analysis is that important to you, you’re probably going to want to buy separate software.

Another key point is the quality of research and reporting tools available to you. Numerous groups offer broker research, but who’s the broker? How many stocks do they cover? Do they include buy and sell recommendations? The second Infochoice table shows you what the various providers offer, but in all cases you’re going to want to dig a bit deeper into what you’re really getting.

Let’s take a look at CommSec, for example. There is regular market update news from people like chief economist Craig James and market analyst Juliette Saly. What about on specific stocks? All stocks have a main view screen, offering key measures like P/E ratio, dividend yield and stability, risk ratios, total shareholder return in recent years, earnings and dividends forecast, and growth rates. You can also see a summary of current analyst recommendations, sourced from EL&C Baillieu Stockbroking, Intersuisse, Morningstar and Shaw Stockbroking. Another screen gives you a sense of whether the company has a history of earnings surprises. There are summaries of recent news stories in Fairfax newspapers; announcements; and in some cases analyst research from CommSec brokers themselves, while for $449 a year you can also get access to reports from Aegis. As a quick straw poll of how widespread the coverage of the CommSec analysts is, we keyed in Telstra, IAG, Sonic Healthcare, ABB and Incitec Pivot; we found recent research available on all but Incitec Pivot and, surprisingly, Telstra.

For some investors, the quality and breadth of research may be the single most important decision in selecting a broker, and it varies from place to place. E*Trade, for example, sources its research from AspectHuntley, aap, Fat Prophets, the Intelligent Investor and Wise-Owl – mainly investment commentators. NAB offers Aegis research, and gives market commentary twice a day from Reuters and RWE. Macquarie Edge will give access to Macquarie Research – wide ranging and well regarded. 

Brokers emphasise cost, although we suspect that’s not the differentiator it once was, particularly for occasional traders. Pricing has settled in the $15-30 range, whereas old-fashioned phone broking was always much higher than that and even today is typically around $70 per trade. According to Infochoice the cheaper providers are Interactive Brokers, Amscot Online Stockbroking and Bell Direct. Macquarie’s new platform starts at $23.95 a trade and can go as low as $18.95, CommSec’s internet preferred pricing is $19.99 up to A$10,000 and $29.99 above, and E*Trade starts out at $32.95 coming down to $21.95 depending on the number of trades. In all cases, beyond a certain point (such as $30,000 for E*Trade) the brokerage fee is replaced by a percentage (0.11% in this case).

And remember: it’s easy to migrate stocks from one provider to another so if you don’t like your broker, try another. One consequence of the shift from the human broker to the machine is that there’s no need for loyalty.

BOX: How we choose 

How do we choose our brokers? A detailed study by the research group Investment Trends, based on responses from 5,100 current share traders, gives us some answers.

 The biggest single reason people select an online broker is because of an existing relationship. 40% of people consulted in the Investment Trends survey named this as a consideration. This clearly supports the online platforms of banks, particularly those where you can combine a bank account with your online broking account. Examples are NAB, Westpac, Macquarie and CommSec (part of the Commonwealth Bank group), while E*Trade is now linked with ANZ.

 The next biggest reason is cost and value, mentioned by 31% of people, and then the trading platform itself, at 17%. This suggests that the actual merit of the system ranks only third in the list of considerations people have and is mentioned by less than one person in five. Smaller numbers mention trust (9%), service (8%), research (6%), range of investments (just 2%!), advertising (2%) and only 1% mention conditional orders.

 The ranking changes considerably when the data is cut to show how frequent traders behave. Investment Trends defines a frequent trader as one who trades at least four time a month. Among that group, the trading platform is more important and mentioned by 27%; service, at 12%, is also more important, as is the range of investments (5%) and conditional orders (3%).

 Investment Trends also noticed that the reason given depends on the broker. 46% of CommSec’s clients cited fees as a driver of their selection. At E*Trade, price was mentioned – which is odd, since it’s far from the cheapest online broker – and a link with existing accounts (26%). At both NAB Online Trading and Westpac Broking the link to an existing account was especially important – 65% of NAB clients cited it, and 49% of Westpac. At Bell Direct, 78% mentioned fees, while at Macquarie Prime, 21% said they chose the broker in part because of the availability of leverage. 

 Three other interesting facts from the Investment Trends survey:

• The number of active traders grew by 20% to 600,000 since the group last did this survey a year earlier.
• For participants in this survey, the average person has 1.5 open online broking accounts
• One in six share traders said they were at least somewhat likely to change their main broker within 12 months.

 So, in summary: more of us are going online; and while we don’t feel especially loyal to our brokers, it’s simple things like convenience and cost that attract and keep us there.