Russia’s invasion of Ukraine has hammered the global economy in ways that seemed unimaginable weeks ago. Around the world, energy, supply chains, trade, and banking systems have been thrown into disarray. Meanwhile, interest rates are rising, inflation is high, and hordes of new investors have stormed into the market during the past two pandemic years. It’s no wonder that stocks have been rocked by crosscurrents that are often hard to identify, let alone chart.
How does the self-directed investor manage? With difficulty—for even the most experienced and levelheaded among us.
This year, Barron’s annual survey of online brokerages is appearing at a particularly uncertain moment. For many younger investors, this kind of turbulence is alien. The global financial crisis occurred more than 13 years ago. And with the exception of the short, if steep, Covid-related downdraft in March 2020—a period before many of today’s investors bought their first stocks—almost an entire generation has witnessed a steady, upward trajectory in equities.
It has been a rude awakening. Millions of eager young investors piled onto trading platforms for the first time in 2020 and 2021. They were often attracted by slick, easy-to-use trading apps and mesmerized by the din of the crowd, amplified on social media. This crested in early 2021, when online message boards, primarily Reddit’s WallStreetBets, whipped up a frenzy for beaten-down issues such as retailer
(ticker: GME) and movie-theater chain
AMC Entertainment Holdings
(AMC). So-called meme trading was big news. Now, it seems like a quaint bit of pandemic diversion.
Are investors prepared? These markets require sober analysis and reflection, not emotional chatter. Investors need sophisticated strategies and accurate analytics, not off-the-cuff peer pronouncements. This creates demand for websites that can integrate market data with personal holdings, filter expectations, and perform multiple tasks quickly and efficiently. The best brokerages attempt to meet these challenges and more. Others, well, fall short.
This year marks the 27th annual Barron’s Best Online Brokers Survey. For the first time, we included financial-technology apps in the official mix. We selected the three most prominent to review:
(HOOD), Webull Financial, and
(SOFI). To make room, we dropped SogoTrade, TradeStation, and TradingBlock, brokerage sites that failed to attract the numbers boasted by the leading financial-technology companies, or fintechs, or to achieve much in earlier rankings. We made another addition: a big bank. After declining to participate over the past two years,
(JPM) J.P. Morgan Self-Directed Investing agreed this year to participate in the survey. And, once again, Vanguard chose not to cooperate. In all, we reviewed a dozen trading sites.
As we did last year, we conducted remote interviews with all of the firms, which ran demos of their sites. They also responded orally and in writing to 80 survey questions. We then independently worked through their platforms. The assessments reflect a baseline understanding of what is on offer, which improvements have occurred over the past year, and which deficiencies still exist.
As we explain in our description of our ranking methodology, we continue to put a premium on brokers that offer effective, well-designed tools for mainstream, self-directed investors. If mobile-only sites suffer, so do brokerages that exclude elements that are necessary for an active trader or investor. Our top-rated brokers reflect the depth and complexity of markets and investors.
The top brokerages appeal to the widest possible range of users in ways that continue to impress. None surpasses
Interactive Brokers Group
(IBKR), which took first place for the fifth year in a row. This time, the Greenwich, Conn.–based operation won by a 13-point margin over runner-up Fidelity Investments, which had tied for first two years ago and was a close second last year.
(SCHW) tied for third , while TD Ameritrade came in at fifth place. Compared with its showing in last year’s rankings, Schwab jumped two positions and E*Trade one, while TD Ameritrade fell by two. Schwab owns TD Ameritrade, while E*Trade is a unit of
Merrill Edge ran close behind in sixth place, narrowly topping tastyworks in seventh. Webull checked in at a very respectable eighth.
Thereafter, the totals drop substantially. Ally Invest came in ninth, followed by Robinhood and J.P. Morgan, tied for 10th. SoFi brought up the rear.
Most brokerages’ scores improved. We’d like to think this is less a case of grade inflation than of continually building new features, technologies, and insights atop a solid base—in other words, getting better.
They did so despite facing major challenges. None was bigger than accommodating millions of first-time traders, an onslaught that began in 2020 with Covid stimulus checks, lockdowns, and stay-at-home boredom, and only accelerated in early 2021. “Meme trading, for all its silliness, further propelled the growth of retail investing, which had taken off in 2020,” says Christopher Larkin, managing director, digital brokerage product at E*Trade. “That was an industrywide growth pattern that we all saw and one we just didn’t expect.”
While almost all brokerages recorded dramatic increases in customers, the lion’s share of scrutiny fell on Robinhood, whose number of users nearly doubled in the first half of last year to 21.3 million, a remarkable number. Robinhood went public in July. According to the company, 50% of its users last year were first-time investors.
That kind of meteoric trajectory took its toll. During the height of the meme trading frenzy, Robinhood struggled to handle the volume, volatility, and clearinghouse-deposit requirements. In late January 2021, it was forced to restrict trading on a handful of meme stocks, including GameStop and AMC. That triggered regulatory scrutiny, lawsuits, and lots of bad will. And, at the time, Robinhood didn’t have a customer-service telephone line.
“The area fintechs always excel in is design…. Where they lag is in the volume of information.”
Robinhood lost four million users in 2021’s second half. Some dropped out; others switched. “We have a saying that Robinhood is their first account; Webull is their second,” says Webull CEO Anthony Denier.
Over the past few years, much has been made of the rapid growth of fintech apps and how they stack up against traditional brokerages. These apps tend to be long on looks and feel, and short on substance. This comes at a price, with critics warning about apps that make trading stocks a game like legalized sports betting and as easy as downloading a movie.
“The area fintechs always excel in is design. They’re making things simple to understand. They’re using accessible language. The experience is intuitive,” says Jen Taylor, senior director of research at Corporate Insight, a financial-services research and consultancy firm. “Where they lag is in the volume of information.”
However, it’s not necessarily a straight fintech/online brokerage dichotomy. Webull aptly demonstrates that a fintech potentially can rival online brokerages in substance as well as looks. Denier says the distinction extends from the site’s capabilities to its clientele: “Our type of trader is similar to that of a [TD Ameritrade’s active site] thinkorswim customer that utilizes these advanced tools, charts, to try to be a smarter trader, try to make better intraday trades, longer-term decisions based on charting, on real analysis, rather than what people are talking about on Reddit.”
The rise of fintechs underscores the muscle—both realized and potential—of younger investors. Brokerages are grappling with how to attract, educate, and accommodate this generation. Mobile-centric sites are just one manifestation. The use of social media is another. Fidelity, for example, launched its own subReddit and TikTok channels over the past year, and is an avid Instagram user. “The goal is to make saving and investing feel more accessible and relevant to potential clients in a more approachable way,” says Scott Ignall, head of Fidelity’s retail brokerage.
Approachable and comprehensive: a tricky balance. Brokerages report that even relative newcomers are jumping into options trading, a trend that is likely to grow if markets continue to gyrate. Increased access to micro-futures products boosts demand. “We have more customers trading futures and forex and opening new futures and forex accounts than ever before,” says Adam Hickerson, a director at Charles Schwab Futures & Forex.
That means brokerages must offer more-directed primers on options and the other products—ones long on explanation and short on jargon but sufficiently clever to gain usage.
The fintech/brokerage binary isn’t the only one. Most entities started as brokerages and developed as such. Some, however, were created as parts of much larger financial institutions. We surveyed three of these: Ally Invest, J.P. Morgan Self-Directed, and SoFi Invest. They all market their investing as part of a broader financial-services continuum, and their websites and mobile apps are set up this way. Therein lies the problem. Investing is just one of several equally weighted products. A savings account or a mortgage figures as prominently on them as a brokerage account.
While these financial-services companies push an overarching site, some brokerages are moving in the opposite direction and coming out with more-specialized apps. Interactive Brokers, for example, has recently unveiled two—one that focuses on socially responsible investing, the other on global markets. According to Taylor, this development is, in some ways, a throwback to a strategy of a decade ago that was dropped in favor of a single app. “It will be interesting to see how that plays out,” she says.
While brokerage mergers have slowed, some big names are still working through postmerger integrations. In 2020, Charles Schwab acquired TD Ameritrade, and Morgan Stanley bought E*Trade. Early last year, United Kingdom–based
IG Group Holdings
(IGG.UK) acquired tastytrade, tastyworks’ parent. How successful these deals are will help determine the future of self-directed investments. That’s especially true for the Schwab–TD Ameritrade combine, which potentially could become a single online brokerage even more dominant than the two are now, as they operate separately.
Brokerages continue to shop for acquisitions that can provide specialized products or expertise. One example: direct indexing, the ability to track an index through sampling individual stocks, instead of relying on mutual or exchange-traded funds. Wealthy individuals and institutional investors have engaged in direct indexing for years, through separately managed accounts, or SMAs. Interactive Brokers already offers direct-indexing tools for self-directed clients, and Fidelity announced that it will launch a direct-indexing product in coming months for a minimum investment of $5,000.
A number of specialized companies excel in this area. Schwab led the way when it bought Motif in 2020. Last year, Morgan Stanley grabbed one of the field’s notables, Parametric Portfolio Associates, by acquiring Parametric’s parent, asset manager Eaton Vance. Vanguard bought Just Invest, and JPMorgan Chase acquired 55ip.
In September, Schwab filed documents saying it was launching a pilot project in direct investing SMAs, with a rollout expected this year. Schwab’s minimum investment is $100,000 and will be marketed through financial advisors, but many expect the company to eventually use the technology for self-directed investors, a task made easier by fractional-shares trading.
In mid-March, Schwab also launched a suite of 45 thematic stock lists, joining that ever-growing trend. Thematic investing is just another sign of self-directed traders demanding more control over their portfolios.
And, of course, there are cryptocurrencies, which are steadily gaining in interest, if not always in activity. To date, the online brokerages are divided. Independents are eagerly offering Bitcoin, ether, and other cryptos; Interactive Brokers is the latest. But firms that are part of bank holding companies simply can’t, prohibited by at least three U.S. government agencies. But many say they are formulating plans to do so once the government flashes the green light.