Is Bank of America really offering commission free brokerage accounts?

Bank of America is offering commission free stock trades, but there is a catch. In order to qualify for “free” trading, a Bank of America customer must have at least $25,000 in combined Bank of America accounts. The initial press releases from Bank of America implied that the combined balances would include the brokerage account balances, but it turns out that brokerage account balances are not included under “combined accounts”. Therefore, in order to qualify for free trading a customer must have $25,000 in combined checking, savings, money market, and CD accounts.

If Bank of America included the brokerage account balance in the minimum $25,000 threshold, this deal would have wide appeal to many investors. However, the free trading offer is much less appealing to many investors considering the requirement to park 25K in cash at Bank of America. Additionally, Bank of America money market and CD rates are not very competitive. For money markets balances over $10,000 and under $25,000 Bank of America pays only 1% compared the national average of about 4% (bankrate.com). One year CD rates at Bank of America are better at 3.85%, but still below the national average of 4.8%.

In addition to the minimum account balance problem, the investment tools at Bank of America lag behind the competition. Do not expect any streaming quotes or Nasdaq level II access from a Bank of America brokerage account. The free trades offer is also limited to 30 trades per month, which is fine because anyone who trades more frequently than 30 times per month probably wants a direct access broker with more trading tools anyway.

Bank of America claims that 52 million Americans have the assets to qualify for a free trading account, but they fail to mention that a large percentage of this population does not want $25,000 sitting in cash. However, for investors who don’t mind parking a large amount of cash, the Bank of America free trading offer will be appealing. Execution times for trades are decent and for customers who already have banking accounts at Bank of America having a brokerage account their as well will simplify account maintenance.

The best option for keeping $25,000 in cash at Bank of America is the 3.85% CD. Since this CD is about 1% less than CDs offered elsewhere, investors will lose about $250 a year by signing up for the Bank of America free trading. Therefore, for investors who have more than $250 a year in trading fees, don’t mind minimalist trading tools, and don’t mind keeping $25,000 in cash, a Bank of America brokerage account makes sense.

For investors who don’t have $25,000 in cash or simply don’t want to park $25,000 in cash, there are some other free trading options. Zecco started offering free trades about 6 months ago at www.Zecco.com with a low $2,500 minimum balance. Zecco claims they are able to offer free trades because they don’t spend massive amounts on advertising like E*TRADE and Ameritrade. Zecco has received venture capital money from some leading firms, but so far the number of investors opening new accounts has lagged expectations. Wall Street Mayhem recently opened an account with Zecco to test out the service so check back in about a month or so for a full review of Zecco.

General broker recommendations

There is no perfect broker. Some have low fees, some have direct access, some have advanced features. Each investor has a different set of needs from their broker. Therefore, we have broken down the recommendations based on the users trading activity.

Long Term Buy and Hold Investor

Sharebuilder is a good choice for the long term buy and hold investor. Although recently other brokers have started offering better commissions (particularly on the sell side) Sharebuilder is still a good choice for the buy and hold crowd. At first glance Sharebuilder has very competitive commissions, $1-$4 for automatic investments appeals to just about everyone. However, Sharebuilder is much less competitive when it comes time to sell. There are no “window trades” to sell a stock so real time trades for the basic plan (which does not have a monthly fee) cost $15.95. On the surface this seems high for a brokerage that touts low prices and the ability buy stocks with very little money, but in practice the relatively high sell order fees could be a blessing in disguis for many investors. Since the fees are five times more expensive to sell than to buy, Sharebuilder creates a buy and hold mentality for many investors. Over the long haul this strategy should pay off as long as the investor buys high quality long term stocks.