The Best Brokerages for Funds

If you're a savvy investor, you probably haven't selected your brokerage because of its snazzy logo or a pen and pencil set it offered you in exchange for opening an account. You probably evaluated how much it charges for stock trades, what other fees it charges, how responsive it is to your inquiries, how much interest it pays and charges, what its minimum investment amount is, and perhaps whether it has a local branch office (if you like face-to-face interactions).

However, you may not have paid as much attention to how well it will serve your mutual fund needs as you did to how well it will serve your stock needs. And that may have been a mistake. Why? Well, because mutual funds are a compelling way to invest. Here are some of their advantages:

• They're simple. Once you've selected some good ones, simply invest your money and watch it grow over time.
• They let smart people manage your money. If you're not a great stock analyst, you can trust your hard-earned money to people who are great stock analysts -- if you've selected the right funds.
• They offer some very solid returns. The stock market, overall, has returned an average annual return of about 10% over most of the past century. Some top-notch funds have long-term track records of 12% or 14% or even more. Those few percentage points can mean a difference of hundreds of thousands of dollars in the long run.

But back to brokerages.

Fees, please
The first thing to know is that while your brokerage may charge you $8 per stock trade, that's not necessarily what you'll be charged per mutual fund trade. Roy Weitz looked into these fees at his fundalarm.com website a while ago, noting, "Given the fierce competition in the brokerage industry, and how easy it is to comparison shop online, we were surprised at the tremendous range of commissions, all the way from free fund trades at Firstrade to a potential high of almost $165 per trade at Schwab." (Schwab has recently been lowering its fees.)

Below are some representative fund-trading fees. Note that many brokerages classify some of the mutual funds they offer as "NTF," for no transaction fee. These NTF funds will cost you nothing to buy or sell via that brokerage. The fees below are for no-load funds that are not NTF.

• TD Ameritrade: $50 to buy, sell, or exchange
• E*Trade: $20 to buy or sell; $40 to exchange
• Fidelity Investments: $75 to buy or exchange; $0 to sell
• Firstrade: $0 to buy, sell, or trade
• Muriel Siebert: $35 to buy or sell; $70 to exchange
• Schwab: $50 to trade loaded funds
• Vanguard: $35 to buy, sell or exchange
• Scottrade: $17 to buy, sell, or exchange
• T. Rowe Price (Nasdaq: TROW): $35 to buy or sell

Selections vary
There's more to consider than the fee, though. For one thing, if a brokerage charges an arm and a leg for fund trades, but most of its funds (or most of the ones you want) are NTF, then the fee is mostly moot.

Check out the fund selection at any brokerage you're considering. Schwab offers around 5,000 funds, which may seem like a lot, but Ameritrade lists more than 10,000 and Muriel Siebert more than 13,000.

(By the way -- you can learn a lot about how to evaluate brokerages in our Broker Center, which also features a handy comparison table.)

A final option
Another option worth considering is simply buying your fund shares from the fund company itself. In other words, if you want to invest in Legg Mason's fund that has beaten the market for 15 years running, its Legg Mason Value Trust, you could just go to the Legg Mason website, request "new account" forms, and mail in a check. The cost to invest: a stamp.

Buying shares directly from the fund company isn't hard, but it does have some drawbacks. For starters, it's usually not as quick as filling out a few boxes and clicking a few buttons on your brokerage's website. It might take you one or two weeks instead of one or two minutes. Next, selling can also take a little while, though there may be ways to speed it up. (Selling via your brokerage is usually simple.) And if you want to move your money from one fund to another fund from another family, that's more work when you're not doing so via your brokerage. Still, if you know you want to hold on for many years, opening an account directly with the fund family can be the cheapest way to go.

If you'd like to learn more about brokerages, click over to our Broker Center. And if you're looking for some great funds, one place to find some terrific ideas is our Motley Fool Champion Funds newsletter. Try it free for a month, and you'll be able to access all past issues and see which funds analyst Shannon Zimmerman has recommended -- and why. Together, his picks have gained an average of 18% versus 8% for benchmark indexes. Click here to learn more.

Here's to a happier portfolio!

This article was originally published on June 1, 2006. It has been updated.

Longtime Fool contributor Selena Maranjian owns shares of no companies mentioned in this article. For more about Selena, view her bio and her profile. You might also be interested in these books she has written or co-written:The Motley Fool Money GuideandThe Motley Fool Investment Guide for Teens. The Motley Fool is Fools writing for Fools.