Thursday, March 29, 2007

Why I hate Sharebuilder as a Broker

Dual Income No Kids just posted about their plan to use Sharebuilder for a $75 purchase. I probably overstepped my bounds but I REALLY hate Sharebuilder so I had to respond. My response is below:


Just a quick comment about Sharebuilder. I started investing through them and I kick myself every single time I see the statements because I lost so much to fees and selling is so expensive. I'm really not a fan of this brokerage for several reasons. The biggest reason is that the price sounds good, but really it's not. You're paying almost 5% commission on that $75 transaction which is not even close to being a good deal even though $4 sounds great. That doesn't even take into account the sales fee which is about $15. The rule of thumb that I teach my students is that if your transaction expenses are more than what you would pay annually for a good fund (less than .5%) then you don't have enough money to invest in individual stocks. You'll get eaten up by fees and it's a fact that high fees are one of the things that can most damage your investment returns.

On top of that, you aren't diversified because you're only buying one stock at a time and you have zero control over when you buy.

A much better idea would be to invest in a no-load fund through Vanguard or Fidelity. Or, if you don't have enough for the minimum to start an account with those brokerages, T-Rowe Price has a program where you can start a Roth with as little as $50 if you sign up for automatic contributions.

The benefits of this would be 1 - you wouldn't be wasting money on transaction fees (who wants to have a 5% guaranteed loss the second you purchase the stock?!), 2 - you would be diversified instead of risking your money on just a couple stocks.

If you really insist on using Sharebuilder I'd consider buying an ETF instead of an individual stock. You'll still be losing a big chunk to transaction costs but at least you'll be diversified. Personally I love DVY and since Sharebuilder allows free DRIP it's good for that brokerage.

So, sorry for butting in but I hate to see people spending more than is necessary.

Good luck and if you have any questions don’t hesitate to ask.



mOOm said...

Obviously the guy has big stock investments so diversification isn't a problem. But it's nuts to buy $75 of a stock unless it was with Zecco or some other free or ultracheap broker. Interactive Brokers charge $1 for that transaction ($5000 account minimum)