The Basics 15 questions to ask discount brokers

If youre not big on hand-holding when it comes to investing, a discount broker can be an economical way to go. Just be sure to ask these important questions — before you sign up.

Discount brokers can save you big bucks when you trade, but you need to ask some probing questions before you sign up. If you don't, you may have an expensive surprise when you open your monthly statement.

Discount brokers are the way to go if you do your own research and make your own investing decisions. But dont consider them if youre the type of person who needs a second opinion before pushing the button. While theyll be glad to explain the difference between stop limits, stop losses, and so on, dont bother asking whether the markets headed up or their views on Intels (INTC, news, msgs) prospects.

That said, discount brokers are seriously cheaper than so called full-service brokers, and theres no point in paying hefty full-service fees if you dont need their advice.

But not all discount brokers are the same. Fees and services are all over the map, and broker ads dont begin to tell the whole story. Here are 15 questions you should ask every discount broker before you sign on the dotted line.

Start with the basics

What is your minimum opening balance requirement?

Theres no point in pursuing a broker if youre thinking of starting with $1,500, but the broker wants to see a check for $15,000 before processing your application.

Do you offer 24/7 customer service by telephone?

Whether a newbie or an old hand, sooner or later something will go wrong, and youll have to call customer service. I use the word call advisedly, because trying to solve problems by e-mail just doesnt cut it. Also, if youre like me, you may find yourself entering trades at night, so 24/7 customer service is a big plus. As a check, try calling the customer service number at different times to see how long it takes them to answer.

Do you have a walk-in office in my area?

Sure, this is the Internet age and you should be able to transact all your business via postal mail or e-mail. But, at least in my experience, eventually youll run into a situation where a visit to your brokers office is the most practical way of solving a problem. Thats why I would put serious money only in a brokerage with local walk-in offices.

Are your accounts insured by the SIPC?

All major brokerages insure your account up to certain limits with the Securities Investor Protection Corp. (SIPC), in case the broker goes belly-up. Still, it doesnt hurt to ask.

Scope out the research tools
If youre a fundamentally inclined stock investor, access to analyst research reports will help you make better decisions. While MSN Money and other sites offer plenty of fundamental data, they dont have much in the way of research reports, at least for free. Thats a gap your new broker can fill. Start with Standard & Poors.

Do you offer free S&P stock reports?

S&P doesnt do investment banking, so it doesnt suffer from conflicts of interest that weve heard so much about. S&P rates stocks from one to five stars; five is best. S&P has plenty of data showing that five-star-rated stocks outperform four-star stocks, and so on. Many brokers offer free S&P reports and that should be a requirement if youre a medium- to long-term investor.

Do you offer any free brokers analyst research reports?

Despite the problems, there is still much to be learned by reading brokerage research reports, as long as you take their buy/sell ratings with a grain of salt. They often give background on the companys industry and competitive position, which can be difficult to find on your own. Many discount brokers offer at least one brokerage firms reports at no charge.

Evaluate mutual funds and fees

How many mutual funds do you offer, and how many of those are no-transaction-fee funds?

What is the fee for trading transaction-fee funds, and do you charge two transaction fees if I sell one fund and buy another at the same time?

You can trade most stocks through any stockbroker, but thats not so with mutual funds. No broker makes all existing mutual funds available to its customers. Each offers a different menu of funds. Of those offered, some can be traded with no commission, while others incur a transaction fee every time you buy or sell the fund. Those fees vary widely between brokers. Also, some brokers charge only one transaction fee if you sell one fund and buy another at the same time, while others sock you twice.

What is your minimum mutual fund initial purchase requirement?

Most mutual funds require a specified minimum purchase amount the first time you buy the fund, but some brokers have their own minimums, which may be higher.

What is the minimum holding period for mutual funds without incurring a penalty?

Some mutual funds charge a penalty if you sell your holdings before a specified minimum period has elapsed, but some brokers apply their own minimum holding period that applies to all funds. Most of us plan on holding funds for a relatively long time when we buy. However, things change, and its nice to have the flexibility of selling without getting hit with a penalty.

Consider your trading habits
I plan to maintain a $_ minimum balance and do around ___ trades per quarter. Given my situation,how much do you charge for market orders and for limit-order Web trades? Also, do you charge a separate order-handling fee, and if so, how much? Discount brokers make much of their money collecting trading commissions and associated fees. They cant cover their costs if you dont trade much. Consequently, your trading commissions depend on your trading activity and on the assets (cash plus securities) in your account.

Also, advertised trading commissions dont tell the whole story. They often apply only to market order trades, and it costs more if you place a limit order. Moreover, some brokers add a $3 or so order-handling fee to their published commissions.

Given my situation, do you have an account maintenance fee, and if so, what is the minimum trading frequency and/or account balance requirements to waive the fee?

A broker may hit you with an account maintenance fee if you dont trade enough, especially if you carry low balances. For instance, a broker might charge a $15 per quarter maintenance fee if you dont do at least four trades per year, but waive the fee if your account balance exceeds $10,000 in total assets.

How much do you charge for trades placed via your touch-tone phone system, or for orders placed with a live broker?

There will be times when you want to place a trade but you cant do it through your computer. Maybe youre not near your computer, or for some reason, you cant access your brokers Web site. Thats when youll want to phone in your order. Most brokers provide a touch-tone order entry system, but again, they charge more than for trades placed via the Web. The fee is even higher if you place your trade with a live broker.

And finally

Do you offer a dividend reinvestment plan?

Investors have been paying more attention to dividends since the recent tax cut. Normally, your broker adds received dividends to your cash balance. But many investors prefer to put that cash back to work by reinvesting the dividends back into the companys stock. To do that, your broker must offer a dividend reinvestment plan.

Can I download my account details from your site to my MSN Money or Quicken portfolio?

It will save you loads of time if your broker automatically updates your MSN Money or Quicken portfolio, thereby eliminating the need for manual entry.

Do you charge an IRA maintenance fee, and if so, how much?

Some brokers charge a fee simply for maintaining your IRA account. Why pay it if you dont have to?

You should be able to cover these 15 questions with any brokers new account rep in five or 10 minutes. Its time well spent. Look elsewhere if they cant answer them.

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