Incentives sweeten the pot for do-it-yourselfers

When Gail Bebee was preparing to open a new online investing account a few years ago, she compared the alternatives and was leaning toward one of the bank-owned discount brokers.

Then she got a pleasant surprise: The broker began offering generous cash payments, based on a percentage of assets, as an incentive for customers to transfer their accounts. For Ms. Bebee, that made the decision a no-brainer.

The money she received "paid for my trip to New Zealand," said the personal finance speaker and author of No Hype: The Straight Goods on Investing Your Money.

That promotion is no longer being offered, but Ms. Bebee's experience underlines the importance of shopping around and researching online brokers before opening an account. The time to ask about incentives, negotiate discounts or find out what research, trading and educational services are offered is before you sign on the dotted line, not after.

In a competitive industry where firms are battling for assets, you may be surprised by what you can get just by asking.

I won't be going to New Zealand any time soon, but when I was recently transferring my kids' registered education savings plans to the discount broker where I have my own accounts, I explained to the representative that filling out the myriad application and government grant forms took several hours of work. (I wasn't lying; RESPs may be the single biggest threat to our nation's forests.)

"It is taking me a lot of time to transfer my business to you. Is there anything you can do for me?" I asked. Not only did the agent happily reimburse the other institution's transfer fees of $262.50, he threw in a $50 "goodwill gesture" for my troubles.

Asking about discounts and incentives is just one aspect of shopping for a discount broker.

If you're a stock picker, you should find out what investment research is provided. Many discount brokers will throw in their own firm's research free of charge.

For investors with small nest eggs, it's important to inquire about the minimum account sizes required to avoid annual maintenance fees on registered accounts. Newbies should ask about the educational tools that are available to teach everything from entering an order to more complex investing topics such as asset allocation and fixed-income laddering.

"The discount brokers are getting better with tools," Ms. Bebee said. Some offer instructional videos and practice accounts so you can learn the ropes of online investing. For more advanced investors, some discount brokers offer interfaces designed to facilitate quick trading.

"It really depends on what you're looking for. If you are a frequent trader then you're going to want the fast platform," she said.

But if you're just buying and holding mutual funds or exchange-traded funds (ETFs), having a platform with all the trading bells and whistles isn't necessary. In her book, she provides a checklist for evaluating prospective brokers.

Questions to ask include:

• Does the broker provide an adequate range of investments, including stocks, bonds and mutual funds?
• What are the account administrative fees?
• What are the commissions for buying and selling stocks, bonds and mutual funds?
• Are cash transfers to other accounts or institutions available, and what are the fees for such transfers?
• What customer support is available if technical problems occur?
• What research on stocks, mutual funds and the economy is available, and is there any cost for it?
• Are statements easy to understand and do they provide relevant information such as book value of investments (for tax purposes), rate of return calculations and performance against benchmarks?

(For a comparison of discount brokers, see Rob Carrick's annual survey.

With competition increasing in the discount brokerage business, investors are the big winners, says Garth Rustand, executive director of the Investors-Aid Co-operative of Canada.

"It is a great time to be working with a discount broker," he writes in the Investors-Aid Guide to Protecting Investment Returns. "Transaction commissions are dropping and the online account management tools are better than ever, adding even more value."

But investors have to be careful, he said in an interview. One downside of having a lot of research and tools available is that investors may be tempted to trade excessively. That's why Mr. Rustand is a fan of indexing - buying low-cost mutual funds or ETFs that track broad stock or bond indexes - and rebalancing the portfolio only annually or semi-annually. To that end, asset allocation tools provided by discount brokers can be a big benefit, he says.