An interesting brokerage option for the fee hater in all of us

June 3, 2005

A few months ago we discussed several brokerage supermarket choices in response to Scottrade raising their fees from zilch to $17 per trade to buy and sell certain funds (others remain NTF, or no transaction fee).

Since the easiest way to follow our model portfolios is at a broker’s fund supermarket (verses buying the funds directly from several different fund companies), scrutiny of the available choices is important – especially since you pay for the convenience.

A couple of subscribers recently notified us about <a href="https://www.firstrade.com/">Firstrade</a>, a relatively unknown discount broker that has what Scottrade no longer does: free fund trading. We opened up an account with Firstrade and checked it out.

So far, so good. 

As we’ve noted before, investors can buy most higher fee, no load funds at any discount broker (Schwab, TD Waterhouse, Fidelity) because the funds pay the broker for the privilege. Lower fee funds, like many in our portfolios (such as Vanguard), do not pay brokers for such placement, and can only be bought by paying a commission to buy and sell. About half of our model portfolio funds can be had for no transaction fee through most brokers.

Firstrade allows buying and selling of even Vanguard funds for no transaction fee. Like other brokers, Firstrade levies a short term redemption fee if you sell an NTF fund within a certain time period. At Firstrade this fee is $19.95 if you sell within 180 days, on top of any short term redemption fees the fund charges. At Scottrade the short term fee is $17 for a 180 day or less sale, but this fee is on top of Scottrade’s normal buy or sell fee of $17 if the fund is non-NTF.

Firstrade is dirt cheap for buying stocks as well, which is noteworthy for us because in some portfolios we own ETFs, or exchange traded funds, which trade like stocks. The commission for market or limit orders is $6.95 (five cents less than Scottrade).

Total fund availability is just as important as the fees.  The best broker for fund choice is TD Waterhouse (which is unfortunately one of the more expensive). Firstrade’s availability is comparable to Scottrade, which means it would make a good choice for newsletter subscribers as all of our model portfolio holdings are currently available at Scottrade (not including some older, now closed funds). E*Trade has a good fee structure but a somewhat inferior selection.

You can buy any of our newsletter-model portfolio funds at Scottrade EXCEPT American Century International Bond (BEGBX) and SSgA MSCI EAFE Index (SSMSX). The former is found in the Safety and Conservative portfolios, the latter in the Low Minimum.

Firstrade offers fairly quick response times to calls – especially compared to E*Trade, where a call during trading hours can mean a 10 minute wait. Scottrade has branch offices that are usually easy to reach.

Firstrade does not ding you for IRA maintenance charges, low balance fees, and the like. Their house sweep account is about average for brokers and better than many checking accounts. The current yield is 1.4% for customers with more than $25,000 in cash, 1.15% for more than $10,000, and .75% for lower balances. For comparison, a Vanguard money market fund pays over 2% today. 

Since Firstrade doesn’t charge for the privilege, most investors would want to just buy near cash funds like SSgA Yield Plus (SSYPX) or Payden Limited Maturity (PYLMX) anyway (if they can hang on for 180 days to avoid Firstrade’s short term redemption fee). Note that you can’t use these two funds to settle trades automatically like you can with the house account, you would have to sell your holdings to pay for any new buys.

Firstrade’s website is their weakest link, but it’s not far off in quality from many others. The site offers rudimentary, online trading history, statements, confirmations, cost basis data, and figures regarding gain/loss since purchase.  

For the record, Scottrade just updated their website – a nice improvement to the clunky, older version.  Maybe they spent some of the new fees generated from fund trading on a site redesign…

Bottom line, Firstrade is a very good choice for the fee-conscious fund buyer who follows our model portfolios. For those focused on costs, it is currently the best choice.