We’re cheapskates at MAXadvisor. Skinflints, penny pinchers, tightwads. Besides paying careful attention to expense ratios, we bring our cost conscious thinking  to brokerage platform selection. 

For Powerfund Portfolio subscribers, the most efficient way to invest our model portfolios is through a so-called “fund supermarket” at a broker like Scottrade. This way an investor following our model portfolios can trade and track the funds from all the different fund families we recommend, all in one place. 

Unfortunately, using a brokerage platform usually adds a layer of extra costs. As expenses cut directly into your investment returns, it’s important to pay as little for trades as possible. At some brokerage platforms, these fees can be quite expensive. 

For example, we have the Vanguard Short Term Investment Grade fund (VFSTX) in several of our model portfolios, largely because the fund is about the lowest fee fund in a category that really requires low fees. If a subscriber invests $10,000 in the fund at Charles Schwab, they will pay a whopping $70 in commissions. They’ll have to pay another $70 when they sell shares of the fund. That’s $140 – or 1.4%. 

Some funds are available at Schwab for no transaction fee. These are higher fee funds that pay Schwab for distribution. Since we favor lower fee funds in our model portfolios, only about 40% (or less in our bond heavy portfolios which own mostly ultra cheap funds) of our funds are available for NTF (no transaction fee) at Schwab. Even then, Schwab charges another fee to investors if they sell an NTF fund within 180 days of purchase.

These high fees are the reason we do not recommend Schwab as a broker for MAXadvisor subscribers (or anyone for that matter). We do not recommend TD Waterhouse or Fidelity for the same reason. These two are not quite as expensive as Schwab, but are still far too rich for our blood.

We have been recommending Scottrade to subscribers building our model portfolios because there was simply no cheaper place for a no-load fund investor to purchase all the funds in one place. Scottrade had, for the last several years, far and away the most funds available for sale via a no-transaction fee structure – including many Vanguard funds and others with very low expense ratios like Dodge & Cox. In fact, before today all of the mutual funds in our model portfolios could have been purchased at Scottrade for free (although the ETFs in certain portfolios would have to be purchased for regular stock commissions of $7).  

Unfortunately, as of Janurary 3rd, Scottrade is changing their tune. As noted in a recent press release, “Scottrade (is bringing their) no-transaction fee platform philosophy more in line with our major competitors since they have been charging fees for years”.  Scottrade is going to start charging commissions to buy non-NTF funds, which is what most brokers do. 

This means clients at Scottrade can expect to pay a commission to buy Vanguard funds (and others) going forward (but will likely be able to continue to buy funds from companies like Janus, Royce, and American Century for free). From here on in they will charge $17 per fund trade, buy or sell. 

In addition, Scottrade is increasing the time period that short term trading penalties apply. Previously, if you held a fund for less than 90 days and sold it, you would get hit with a $17 fee. Now if you sell any fund within 180 days the $17 fee applies. Note that this is in addition to any commissions on a buy and sell, so if you buy a Vanguard fund, which will require paying $17 to buy and sell, and you sell within 180 days, you will pay a $17 penalty on top of the regular $17 commissions to sell – or $34 in total on the sale.

After Scottrade issued their release, we exhaustedly re-reviewed each and every broker option out there, and while $17 is a heck of a lot more than free, it is still cheaper than anyone else charges, when you factor in all fees including short term penalties. This, coupled with the superior selection of funds available at Scottrade (45% of our model portfolio funds will be available for free at Scottrade, the rest will require paying $17) means they will still be our broker of choice.  We will continue to monitor the fees of these brokers to determine the best option for our subscribers, and will note NTF status of funds from our category favorites list at major brokerage firms.

While we are disappointed by Scottrade’s new fee structure, we think that it remains the best choice for those following our model fund portfolios, and we will continue to select funds for our model portfolios based on their availability on Scottrade – you can assume 100% compatibility. It is worth noting Scottrade also has very few additional fees like account maintenance charges for IRAs, low balance, or charges for account inactivity. 

While Scottrade is now more expensive then they used to be, they are still the cheapest game in town. 

Next month we'll discuss alternatives to Scottrade, including one that is a particularly strong runner up.