28 BARRON’S March1,2021
and mutual funds to individual stock
screens. Some brokerages, including
Interactive Brokers, Merrill Edge, and
Fidelity, prominently display on their
trading and research sites environ-
mental, social, and corporate gover-
nance, or ESG, ratings and peer com-
parisons. Interactive Brokers also
offers an impact dashboard that vets
investments through social and envi-
ronmental indicators, and will soon
launch a stand-alone app that per-
forms the same task.
All of this is a nod to more-socially
conscious investors.
Direct indexing enables investors to
track an index by buying a sample of
individual stocks, instead of simply
owning exchange-traded funds or mu-
tual funds that do the same. In the past,
direct indexing was the domain of
wealthier individuals or institutional
clients. But it’s now being democra-
tized, thanks to another major industry
trend: fractional-shares trading.
Robinhood was a pioneer of
fractional-shares trading in 2019,
followed by Interactive Brokers among
full-service brokerages late in the year.
Fidelity came a few weeks later, and
both Schwab and TD Ameritrade em-
braced the development in May.
Fractional-shares trading arose
because even one share in some of the
biggest namesin stocks—Alphabet
(GOOGL),Facebook(FB), orTesla
(TSLA), not to mentionBerkshire
Hathaway(BRK.A)—may be beyond
the reach of many individual inves-
tors. Why not provide the ability to
invest a dollar amount instead? This
entices the less affluent, but also those
who tend to think of investing in dol-
lars instead of shares.
The days are over when trading
fees and account sizes were barriers to
such strategies. The industry is deep
into a zero-commission, no-account-
minimum environment, which has
become the new normal only a year
after brokerages eliminated fees.
W
ith commissions pretty
much dead, many wonder
just how brokerages make
money. This skepticism
gained credence in mid-December,
when Robinhood paid $65 million to
settle Securities and Exchange Com-
mission charges that it misled custom-
ers by failing to explain that it col-
lected substantial fees for routing
trades to other firms for execution—
what’s commonly known as payment
for order flow. This practice, the SEC
said, resulted in inferior trade prices
and outweighed zero commissions.
Online brokerages come down on
both sides of the payment-for-order-
flow issue, and our survey awarded
points to those that don’t engage in
this practice. But those accepting pay-
ment for order flow stress that they
disclose the practice in SEC filings
and still provide the best execution
prices for their clients. Firms also
insist that their revenue models no
longer depend on trade commissions.
Fidelity has led the charge against
order-flow payments, while Interac-
tive Brokers splits the baby and offers
two plans. This is needlessly confus-
ing. Its IBKR Lite plan, which was
launched in October 2019, is designed
for less active investors and doesn’t
charge commissions. It does pay for
order flow, and limits access to some
of the firm’s more sophisticated tools.
IBKR Pro bundles commissions, but
offers what it calls “smart routing,”
which improves price performance as
well as preferential margin rates and
other financial inducements. So far,
only about 5% of Interactive Brokers’
one million clients have opted for its
Lite version. However, Interactive in
December acquired 70,000 retail bro-
kerage clients from Folio Investments
and expects many of them to choose
the Lite version.
How brokerages balance active and
less active traders, and how consumers
respond, have been issues for several
years. The brokerage survey has mi-
grated more to the demands of longer-
term investors, which our scoring re-
flects. It’s our belief that the vast
majority of self-directed investors
aren’t day trading, formulating com-
plex options strategies, or able to spend
every waking moment scrutinizing the
markets. Their needs, requirements,
and habits now dominate, although
mainstream brokerages can’t afford to
turn their back on active traders, either.
Brokerages are scrambling to meet
customers wherever and however
they can. TD Ameritrade now counts
nine different platforms in which
clients can interact with the broker-
age, everything from live TV to video
on demand, and from Amazon.com’s
Alexa to Apple CarPlay. Some of
these may be gimmicks. Others may
be sweeteners. But it’s the totality
of what brokerages provide that
makes the difference, as they strive
to become indispensable to the
financial lives of their customers,
new and old.B
Big,
Getting
Bigger
Fidelity, like
other online
brokerages,
saw a flood of
new customers
in 2020.
3 Million
That left the firm
with some 26.5
million accounts
by year end.
O
nline brokerages that cater to self-directed investors had a ban-
ner year. They flourished in an environment of free trades, low
interest rates, and volatility, not to mention the advantages of
having nearly everyone working from home. But which firms’ customers
got the most benefit from the efforts of the online brokerages?
Here’s what we discovered, ranking the platforms from first to last.
1. Interactive Brokers/5stars
In 2020, Interactive Brokers established the benchmark for what a full-
service, self-directed brokerage can do. For years, the active traders plat-
form, Trader Workstation, has excelled. That hasn’t changed, and this
past year, it again improved its advanced charting tools.
Equally impressive is just how good the company’s website is, adroitly
demonstrating what’s possible in a clean, well-laid-out presentation. The
company’s IBKR Lite, launched in October 2019, is a payment and market-
ing plan designed for the less active trader, but those users can easily benefit
just as well from what Interactive Brokers has to offer.
Impact Dashboard is perhaps the broker’s most notable new offering
over the past year. This tool allows investors to log preferences in terms of
environmental, social, and corporate governance, or ESG, factors. The
feature calculates how well each company in a portfolio aligns with inves-
tor values.
A companion feature enables specific ESG scores, ratings, and rank-
ings, and it has beefed up ESG research, as well. This feature helped
propel Interactive Brokers to the top of our information category. The
lone downside is that some of its premium research isn’t free. The firm
also came in first for active traders and international traders.
2. Fidelity/5stars
Fidelity remains an all-round brokerage favorite, and for the longer-
term investor, it’s the standard bearer. The site, which ranked best for
investment-oriented traders, provides a bounty of prompts, simple lan-
guage explanations, and intuitive cues, all designed to make investing
less complicated for both novices and more experienced traders. Its new
trading ticket is clean and functional. Fidelity’s fractional-shares func-
tion, which it calls “stocks by the slice,” has proved immensely popular
and helped attract a new, younger, and less well-heeled clientele.
Fidelity is a leader in artificial-intelligence-enabled features. This past
year, the brokerage applied AI and machine learning to customize its
Learning Center based on customers’ investing behavior. This enhances
what is already an all-star lineup of education, news, and research.
3. TD Ameritrade/ 4.5 stars
TD Ameritrade jumped this year in our ratings, thanks to its continued
prominence in technology adoption and what we see as notable improve-
ments in site customization and information presentation. Its active trad-
ing platform, thinkorswim, is still a marvel—intricate, powerful, and com-
plete, yet stuffed with graphics that are understandable and useful to even
novice traders.
Depending on how quickly TD Ameritrade integrates with Schwab,
which acquired it last year, we could see the end to a separate site by this
time next year. We are heartened to hear that Schwab will embrace TD
Breaking
Down Broker
Performance