The past year was a tricky one for the online brokers in Barron’s 28th annual survey. It put to the test their ability to provide tools and guidance for clients with dramatically different needs.
During the pandemic, brokerage websites brought aboard millions of novice investors, many young and shaped by social media, who had been whipsawed by volatile markets. More-experienced self-directed investors, including those near or in retirement, also had to cope with bearish markets, time-tested strategies that no longer worked, and a host of postpandemic uncertainties. As Anthony Denier, the CEO of fintech Webull, says, “In 2022, the market changed significantly and made it very, very difficult for self-directed investors.”
Online brokerages are on the front lines of investing. They must do more than just provide slick, well-designed apps and ever more powerful trading platforms to experienced investors. They must also offer an array of investment education, tools, and guidelines to neophytes, and, as always, information and data in ways that are quick to locate and easy to digest. And given the times, they must do it across multiple devices, from desktop computers to mobile devices.
Brokerages “can’t rely on self-directed, single-stock customers any longer. You have to diversify your offerings,” Denier says. “We have positioned ourselves to be an educational tool, a learning tool, and an access tool.”
This year, Barron’s surveyed 10 brokerages. The winners?
Interactive Brokers
(ticker: IBKR) and Fidelity in a dead heat. While Interactive Brokers took top honors and beat out Fidelity in 2021 and 2022, this year marks a rerun of three years ago, when the pair tied.
Charles Schwab
(SCHW) this year took third place, followed by
Morgan Stanley’s
(MS) E*Trade. Last year, those two firms tied.
In what will be its last year under its own name, TD Ameritrade—bought by Schwab in 2020—came in fifth, followed by
Bank of America’s
(BAC) Merrill Edge at sixth. Their rankings didn’t change from last year. Neither did the final four: Webull; Ally Invest, a unit of
Ally Financial
(ALLY);
Robinhood Markets
(HOOD), and lastly,
JPMorgan Chase’s
(JPM) J.P. Morgan Self-Directed Investing.
All the brokerages saw better scores—evidence of broad improvement—save for Interactive Brokers. Sites are continually adding and refining features and services. We don’t penalize brokerages that have played catch-up. We reward those that show innovation.
Best Online Brokers 0f 2023
This year, we dropped the financial technology app
SoFi Technologies
(SOFI), which we included for the first time last year. We judged that its investment site was, at best, an afterthought to its core lending banking business and failed to provide even basic self-directed investor tools. Active trading site tastyworks declined to participate.
As we have done since the pandemic, we conducted remote demonstrations with participating firms. They responded to some 80 survey questions. We independently examined platforms and awarded points for everything from customer service to margin rates. While we made every attempt to load the survey with quantifiable criteria, our assessments contain some subjectivity. Inevitably, the more complete, thorough, and broad-based the site, the higher the score. A site such as tastyworks, for instance, does exhibit some best-in-class attributes for active traders, especially those who thrive in a social, collegial atmosphere, but it’s wholly inappropriate for those interested in longer-term exchange-traded fund strategies.
Tastyworks objected to that approach. “The self-directed active traders that our platform targets don’t really participate in things like mutual funds and we feel it puts us at a disadvantage to receive a lower ranking for lacking things that our customers don’t look to us for,” a spokesperson emailed.
Our reduced survey universe also reflects what is taking place on the ground: Yes, there are any number of fintech sites that offer equity trading, and some have attracted hundreds of thousands of users. But very few have anything close to what full-service online brokerages can provide in terms of trading capabilities and support.
Two years ago, younger investors flocked to Robinhood and other financial technology apps, wooed by the gamification of trading and mesmerized by social-media led crazes such as meme stocks. That now seems a distant memory. “I don’t know if [meme stocks] have completely fizzled out,” says Ian Bonhotal, a brokerage research manager at Corporate Insight, a financial-services research and consulting firm. “But it’s certainly a shadow of itself.”
Hundreds of thousands of these new investors appear to have fled, while millions of others migrated to more-established brokers.
Nothing illustrates this better than Robinhood. In the boom years, Robinhood dramatically rode the wave of young traders, capturing an astounding 21.3 million users by June 2021, more than double the previous year. Not surprisingly, Robinhood notched a drop-off last year, shedding almost six million users year over year and ending 2022 with 11.4 million, a 34% decline.
Fidelity, by contrast, reported 37.1 million retail investors at the end of 2022, an 11% increase over 2021.
Webull was flat, with what it termed a “small uptick in deposits and accounts.” But, Denier admits, “We saw a lot of our users going from self-directed stock-picking to looking for passive investment tools.”
The retreat of once gung-ho, game-centric young players hasn’t resulted in brokerages turning their backs on millennials and Gen-Zers. Far from it. They’re playing the long game. “Firms over the past year or so have been doing a lot to try to capture these younger investors,” says Bonhotal. “They don’t have a lot of money now. They’re early in their careers. But if [brokerages] can create this safe, easy-to-use, highly educational place for them to start their investor journeys, then they can foster loyalty.’”
Fidelity, for example, launched an app last year called Bloom. Directed at younger adults, it attempts to bifurcate saving and spending through separately managed accounts, and reward users in the process. “There’s a very large population of people who are interested in getting into trading and investing but actually feel like their asset levels are so low, they can’t afford to introduce any risk at all, not even minor risk,” says Megan Moore, who leads Fidelity’s strategy and product development for the app. The default for savings, she says, is Fidelity’s government money-market fund.
We’re now seeing what may be the last leg of a decade of consolidation among self-directed brokerages. TD Ameritrade’s $4 billion acquisition of Scottrade in 2017 and Morgan Stanley’s $13 billion purchase of E*Trade in 2020 were just two of the more noteworthy deals. This M&A wave crested with Schwab’s $22 billion acquisition of TD Ameritrade. That transaction closed in October 2020, and it has taken three years to integrate the two brokerage sites. When it finally finishes, Schwab will emerge as one of two self-directed retail investor behemoths, along with Fidelity.
At the end of last year, Schwab and TD Ameritrade boasted a combined total of 24.7 million retail accounts, about 12.4 million less than Fidelity. (Vanguard, which for years has declined to participate in the survey, reported it had 9.1 million self-directed investors as of May 2022.)
According to James Kostulias, Schwab’s head of trading services and the executive who has led integration planning for TD Ameritrade, an initial group of 500,000 accounts, including 600 traders, transitioned from TD Ameritrade to the Schwab umbrella in February. On Memorial Day weekend, a much larger group, some 5.5 million accounts, including some 200,000 trading accounts, made the move. In September, what Kostulias called “a large majority of our retail clients” will enter the Schwab domain. Two months later, TD Ameritrade’s active traders are scheduled to move, with the “most complex traders,” including those engaged with futures and foreign exchange, bringing up the rear in the first half of 2024.
Schwab is always quick to point out that it isn’t simply subsuming TD Ameritrade. Most notably, later this year Schwab will import TD Ameritrade’s vaunted thinkorswim active trading platform “lock, stock, and barrel,” says Kostulias.
This is no surprise. Thinkorswim is, in many ways, the industry standard for active trading and a big reason TD Ameritrade engenders a large, loyal following. Schwab is also incorporating other TD Ameritrade features, including the popular SnapTicket ordering ticket and some educational and broadcast offerings.
Meanwhile, the investing landscape keeps changing. Dollar-based fractional trading represents one of the most important recent developments. Interactive Brokers pioneered fractional shares in late 2019. Robinhood, Schwab, and Fidelity quickly followed in 2020. Some brokerages have resisted this feature, citing technology hurdles and cost. They may be fighting a losing battle, much as some brokerages discovered when they balked at eliminating equities trading fees a half-decade ago. Fractional trading will become increasingly more prevalent, especially among less-affluent investors.
Fractional trading enables direct indexing, another important trend among self-directed investors since Schwab and Fidelity launched the tool last year. This “massively lowers the bar to investing in a really important way,” says Corporate Insight’s Bonhotal. Direct indexing had been the exclusive domain of high-net-worth investors with separately managed accounts. “Now, all of a sudden, you have retail investors who can build portfolios of fractional shares of hundreds of different investments.”
Vastly improved artificial intelligence also looms on the horizon. As ChatGPT and other natural language processors emerge, software that can smooth even complex processes for novice users looks viable. It’s hard to square this potential with the current state of brokerages’ automated help centers, however, where even basic online queries elicit the chatbot equivalent of a blank stare or a wildly unhelpful information dump.
This past year has seen more incremental improvements than transformative changes—one reason most categories and their relative weightings didn’t change from 2022. But we did adjust where we felt it necessary.
As in past years, we worked with a total score of 200 possible points. There are 101 separate criteria. Each carries a possible score ranging from one to five, with the vast majority scored for one or two. The survey is divided into five categories—trading, mobile, news/information, usability, and international. We eliminated one category this year, dividends and retirement, which had accounted for 10 points, or 5% of the total. Why? Dividend-centric screens are ubiquitous. Saving for retirement isn’t just for those about to retire. We were able to fold those features into other categories.
We took the extra points and boosted mobile and information to 50 points each, or 25%, the same as trading. International retains 10 points, or 5% of the total, a niche for most U.S. investors, but an important one.
Our heavier weighting for mobile reflects the fact that the cellphone is becoming the go-to device among self-directed investors of whatever age, experience, and prowess, and these users demand platforms provide an array of education, Information, and news. There are instances where some criteria might well fit into more than one category; we chose as best we could. However, no brokerage’s ranking suffered because of that. It’s the whole that counts.
We also tinkered with specific criteria and points awarded. Last year, we awarded five points for brokerages that offered cryptocurrency and no points to those that didn’t. Since then, the crypto market has been hammered and events like FTX’s collapse demonstrated that unfettered access to cryptocurrencies poses a significant risk. As a result, we reduced the point total to three. We’ve attempted to analyze not just whether crypto is offered but whether brokerages put guardrails in place. We also understand that brokerages attached to banks have regulatory issues that preclude crypto trading.
As rates rise, fixed-income instruments are making a comeback. We’ve added criteria that reflect this development. Even certificates of deposit now have value. Some brokerages do a much better job of dynamically displaying those CDs than others, and we rewarded them proportionately.
And we’ve focused more on mechanisms that firms offer to take advantage of uninvested funds. Webull puts an exclamation point on this feature, with a nifty red alert box that flashes the current annual percentage yield of an account holder’s cash.
For many investors these days, it’s more about safety and security than about oversize gains and outsize risk-taking—though that, too, may change.
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