Is Your Online Broker the Best in the World?

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If you're a U.S. investor and you use an online broker, chances are high that you're feeling good. Really good. In fact, you're probably among the most satisfied online-broker customers in the world. 

Satisfied, that is, except in two glaring areas.

In its first "Global Online Broking Report," research firm Investment Trends compiled feedback from more than 92,000 investors in six countries and found that online-broker customer satisfaction is tops in the U.S.

With an overall satisfaction rating of 79%, U.S. online brokers edged out Germany, which clocked in at 72%. Singapore, at 62%, had the lowest satisfaction scores of the six countries surveyed. "Of the top 10 online brokers for overall satisfaction," the report states, "nine are from the U.S."

According to Investment Trends, the reasons for the top-notch scores in the U.S. included:

  • Customer service
  • Value for money
  • Website functionality and reliability
  • Costs and commissions
  • Research tools and charting

For Vanguard, the top-ranked online broker in the world according to this report, that's good news -- a happy customer is a loyal customer. It's likewise good news for competitors like TD AMERITRADE  (NYSE: AMTD  ) -- which ranked No. 2 for its thinkorswim service and No. 8 for its main platform -- Charles Schwab  (NYSE: SCHW  ) (No. 3), and Interactive Brokers  (NASDAQ: IBKR  ) (No. 4 for its U.S. operations, No. 5 for its offering in Germany).

Opportunity or risk?
While U.S. online brokers excelled in the areas listed above, they fell comparatively flat on "trading ideas and strategies" and "stock picks and recommendations," where satisfaction levels were 51% and 48%, respectively.

This shortfall could be a future opportunity for U.S. brokers. There's an obvious synergy: Provide investors with ideas, and give them the venue to execute those ideas. Given the lackluster scores, customers would likely respond to better offerings in this area.

But it could also be a risk. For example, my broker -- E*TRADE  (NASDAQ: ETFC  ) , which is conspicuously missing from Investment Trends' top 10 list -- offers investment ideas and opinions in part through research from Wall Street house Credit Suisse. While it may sound great for retail investors to access Wall Street research, it's not what it's cracked up to be. As my fellow Fools John Reeves and Ilan Moscovitz highlighted, for financial analysts, "the profitability of [their] stock recommendations" and "the accuracy and timeliness of [their] earnings forecasts" were at the bottom of the list when they ranked the most important aspects of their job.

The brokers could also offer investment ideas directly, but that's not necessarily a core competency. In other industries, offering recommendations can be a relatively low-risk way to encourage more customer activity. For example, Amazon.com's core competency isn't telling me what I should buy, but if it puts product suggestions in front of me and I do more purchasing as a result, that's a good outcome. If I buy something based on an Amazon recommendation and I don't like it, I may return it and not be keen to jump on Amazon's suggestions in the future. But most of the time, that's not a terrible result for the company or the customer.

If, however, an online-broker customer follows an investment recommendation from her broker that works out terribly, it could mean the loss of a significant amount of money for the customer. And unlike an Amazon book, there are no returns in the investing world.

Two paths
In light of the clear areas of shortfall, the Investment Trends research should be interesting to executives at the online brokers. But what to do with that insight?

One obvious answer is to attack the issue directly -- that is, provide more investment strategies and stock picks.

Another is to spend even more time educating customers. Taking the "teach a man to fish" approach could make customers happier without the need for specific investment recommendations. Perhaps better still, espousing tried-and-true investing approaches that include simple concepts like long-term holding and seeking to minimize fees could also help. Sure, for an online broker, that may not be a short-term win thanks to potentially lower trading fees, but the value of a happy customer over time may be much greater.

Vanguard is a broker that conspicuously lacks flash and sparkle. It was built on the back of low-cost index funds. On its website, it greets potential new customers with a message that reads:

Vanguarding: It's feeling like an owner and keeping more of your investment returns. And it's thinking beyond today, while others shortsightedly chase the next hot tip.

In sum
U.S. online-broker customers are mostly happy. Getting to that next rung of happiness may lie in brokers offering better stock tips. Or, if Vanguard's success is any sign, perhaps it's about teaching customers that long-term investing success is about a lot more than that "next hot tip."

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