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Announcer: You’re listening to Tradestreaming Radio with your host, Zack Miller. Expand your mind. Become a better investor with tools, tips, and technology from the smartest investors on the planet.

Zack: Welcome to Tradestreaming Radio. I’m your host, Zack Miller. This is a place where investors like yourselves come to learn about tools, tips, and technologies to make you a better, smarter investor. Today’s guest is Matthew Klein. He’s the founder of Collective2.com. That’s Collective2.com. It’s a marketplace of trading strategies. He’s been doing this years before it became popular, these trade replication type platforms. It’s a marketplace of trading strategies so whether you’re a buyer, a seller, a publisher, or a consumer, you can go there to find cutting edge, mostly quantitative investment strategies. I’ve been playing around with it, as well. I have a portfolio that I’ve been using, a Tradestreaming portfolio, which is essentially a piggybacking portfolio where I look at some of the top gurus. I’ve spoken about this strategy and written about this strategy on my blog. But I’ve been playing around with the Collective2 platform. I’ll put a link to that, as well. You guys can check out what I’ve been doing on the platform.
Anyway I invited him on the program, Matthew, to discuss sort of the genesis of the program, where they’re headed in the future, and sort of the competitiveness in the online finance space. Thank you to Matthew for joining us on the program. It was a great interview. Hop you guys enjoy it. You can find this interview as well as all my archives on my website, Tradestreaming.com. You can also find the archive on iTunes. Either place, you’ll get what you need. If you come to the website I also publish, within a week or so after the episode has been published, a transcript so if you don’t have the time to listen, you can always read about it. I also post important links, as well. There’s a weekly newsletter I recommend. People enjoy that newsletter a lot. So if you want to stay up to date on the intersection of technology, social media, and investing, come over and give your email address at Tradestreaming.com and I’ll keep you posted. Thanks for your listening. I hope you enjoy this program and we’ll speak to you soon.

Matthew: My name is Matthew Klein and I’m the president, that’s a big term for a little company. I’m the president of Collective2, which is a company that runs a couple of trading related websites. The primary one is Collective2.com and just for your listeners, that’s C-O-L-L-E-C-T-I-V-E and then the number 2 dot com. And I also run a small experimental site that we call YoutualFunds.com. It kind of rhymes with mutual funds, but it’s spelled Y-O-U-T-what is it-U-A-L funds.com.

Zack: So, curious about-we’ll start talking about the sites in depth, but what does Collective2 mean? What does the name itself mean? What image were you trying to conjure up there?

Matthew: Well, I know I should come up with a more interesting story that would make me seem like a very clever entrepreneur but I’ll tell you the truth. I’m a fabulous cheapskate and I had this domain name lying around when I started the company. I have no freaking clue why I have this domain, or what I was thinking of doing with it but there it was. It was free. I already paid the nine bucks for it. I wasn’t going to pay another $9, I can tell you that. And so I started this company under this relatively stupid name. And I’ve been regretting it for the last, oh, nine years or so. But once you build brand equity in a stupid name, you’ve got to keep going with it. And here we are, nine or so years later, with that same name. So now I can try to think of expo stories explaining what Collective2 means, how it harnesses the power of great investing minds all over the world and maybe that works a little bit. But the reality is it was just a random name.

Zack: I appreciate the candor there. That’s an awesome story. So can you tell us a little bit about the genesis of Collective2? Did you start out . . . I guess first explain what Collective2 does and then I’d be interested in knowing the evolution of the concept.

Matthew: Sure. You know, well, when I started the company, when I started the website, Collective2, it wasn’t exactly the same company it is today. But the basic 20 second summary of what we do is we allow traders all over the world, primarily systematic algorithmic traders who have trading strategies that are rules based–although not necessarily. We can talk about that in a little bit. We allow people that think they’re good traders to publish their trading systems. And we verify the results of those systems in a third-party, honest, verifiable way. The genesis of it really was I was very annoyed by all the dishonest people in the world who, and the dishonesty. . .

Zack: AKA financial bloggers?

Matthew: Well, sure.

Zack: Okay.

Matthew: There weren’t bloggers back then but there were people that published newsletters or proclaimed themselves trading geniuses who sold their systems . . .

Zack: Earn 1000 percent in three days.

Matthew: Yeah, yeah. And it’s easy to do that. You just send out a thousand newsletters, each with a different stock tout, right? And you pick the one after the fact that actually did well. I mean, that’s one way of doing it. But the essential genesis of the company was to say, wait a second. Let’s step back for a second. Let’s see who’s real here and let’s be the third party verification service for these guys that can claim to be, who want to publish what we call trading signals. You know, the lingo’s a little unusual, obviously. And so that was the original vision of the site, just a way to kind of authenticate results.
But what really became interesting in the site is we began to add technology layers to the site to allow people to automate the trading of these things in regular, everyday brokerage accounts. So one thing that’s nice about Collective2 is that we’re broker agnostic, more or less. There’s a set, finite pool of brokers we work with but, you know, you kind of bring your own broker account. And you say, you look around on the site. We have all sorts of tools for slicing and dicing our big database of trading systems and results. And you find the system that you enjoy or think is right for you, whatever that might mean for you personally.

And you can, if you want, turn on automation in your brokerage account. Now a lot of people don’t actually automate. They just kind of get the signals in real time, you know, through cell phone or email or messenger or whatever and choose to act on them or not. But for me it’s kind of magical. The notion of automating it is pretty cool and I think that’s what excites people the most about the company.

Zack: And you can automate both sides of trade, right? The model manager, whoever’s sending out those signals, he can hook this up to his account as well. So you’re just replicating the trades that he’s making.

Matthew: That’s right. I mean, the actual input mechanism for the manager or the system vender or whatever you want to call it is, again, we try to be as open and un-opinionated as possible. So you can simply logon to the website and sort of type in trades as they happen into a web screen that looks a lot like your standard retail broker web interface for answering orders. So if you want to do that, that’s fine. If you want to use a third- party application that’s popular in the trading world like TradeStation or MetaTrader or NinjaTrader, you can do that.
We have an open API that allows programmers to essentially program their systems and make the signals happen that way. We don’t-there’s also, we have an email interface, which I guess is API friendly so you can email your signals into a computer that parses them and publish your signals that way. So we don’t really care how it comes it but, yeah, the idea is that you can– oh, and of course as you said, Zack, you can also let, for certain brokers we have the ability to you just kind of control your brokerage account and that effectively inputs the trades into the publishing platform for others to follow.

Zack: Is it fair to say that you started out doing something similar to what Covestor was doing back in the earlier days?

Matthew: Well I think it’s fair to say that Covestor started doing something similar to what we were doing many years before.

Zack: You had your stake in the ground first, yeah.

Matthew: Oh, certainly. I’m not going to let them get away with that. But well, I mean, they’re similar ideas. I’m one of those entrepreneurs that really-maybe this is a terrible failing on my part–I don’t really pay much attention to what else is going on in the space or in the world. And I just do my thing and build the product I want to use. And so I’m probably, what I’m about to say might be 100 percent inaccurate. But it seems to me the Covestor model is much more of a model to dis-intermediate the professional finance world, people that are registered and accredited and small hedge funds or small fund managers who want to kind of cut out the middle man and get rid of an expense layer.
I think the Collective2 model is much more peer to peer. Anyone who wants to publish their methodology can publish it. We don’t have, it’s not an investment advisory business. You don’t actually speak to clients and you don’t personalize your advice. That’s very important in the world of the regulatory regimes we work under.

Zack: Are you registered, by the way?

Matthew: We are registered in the world of futures and Forex with NFA. We are not an investment advisor in the world of equity. And, you know, what we encourage people to do is if they have a great trading methodology and they want to be verified and publish it on the platform, they can go ahead and publish it. It’s much better than publishing a newsletter on paper because you get much wider distribution and there’s an authentication mechanism that lets you have the results tracked.

Zack: I mean, I would assume that most newsletter providers wouldn’t want to be verified because then the transparency sort of can let the word out the king has no clothes, you know?

Matthew: Well, that’s a really interesting observation. And now I’ll share something with you about [inaudible 10:43]

Zack: Professionals as well, right? I mean. . .

Matthew: Yeah, I mean this is not a game where the people that are already successful are clamoring to get into it. Oh, sorry, to my platform, Collective2, for exactly the reasons you mentioned. I mean, there’s no upside for them. They already have the customers. They don’t need to get better distribution for their [inaudible 11:07]

Zack: Right. There’s some channel conflict, actually.

Matthew: And, more important is exactly what you say. I mean, why do they want to be verified. There’s so many, you know, I mean in the world of investing there’s so much out and out fraud. I’m not even going to address that. But there’s a different kind, it’s a much more subtle kind of disingenuousness and dishonesty that goes on with companies that have multi-billion dollar market capitalizations. I mean, just look at the world of mutual funds for a second. All right, not to pick on them in particular.

Zack: Oh, go ahead.

Matthew: But, you start a fund family with 20 different funds and the ones that are unsuccessful you can fold into the ones that are successful. You essentially have survivorship bias and you can then later publish over the last five years this fund achieved this. And you don’t talk about the 20 other funds that either got folded in or stopped. I mean, that’s, nothing illegal about that, right? And that’s what everyone does. But most investors don’t really recognize that when they’re reading those ads in Barron’s or the Wall Street Journal touting fund results, that they’re obviously that the fund manager wants to publish. And so . . .

Zack: Sure, and there’s selective benchmarking as well. I mean, there’s a lot of stuff they do to make their results look better.

Matthew: Yeah, and I get it. I mean, it’s easy to criticize it sitting from far away. But everyone does it and apparently it’s perfectly okay, is my understanding of it. So, you know, there’s a pressure to have to do it. So in the world of Collective2, obviously, those guys aren’t clamoring to get their results tracked in a way that they can’t walk away from the results. I mean, one of the things that’s really hard for me as an entrepreneur is that it’s a hard business because half of your customers hate you at any given time.

And I always think that the thing I most have in common, the business, is the Las Vegas casino. Not for the reasons you’d think. Not for the reason that, oh, it’s just gambling. The real reason is that I think customers-you know, even if you’re in the most beautiful casino, if you’re in the Bellagio in Las Vegas, there’s still security cameras looking at you and there’s still pit bosses deciding how many drinks to serve you. And there’s still a large distrust of the customer base because customers, they don’t like actually using your product. They like the idea of it, but they don’t like the end result.

And very similarly, in the world of Collective2 at any given time, choose your number–20 percent, 30 percent, 40 percent of the people that publish their systems and their methodologies on Collective 2 hate the platform. They hate the site because you can’t walk away from your track record. I get asked all the time by people who say, listen, I published this system on Collective2 and it doesn’t really represent my work anymore. Can you remove it? Which, our policy is no, you can’t.

I don’t know if that’s the wisest policy from a business perspective, but in my mind it help prospective traders really see the historical track record of all the people that it’s obvious. You can get around it in different dishonest ways. You can create separate identities, but it’s a hassle. And so that’s one of the nice things about the, well it’s either nice or not nice depending on which side of the table you’re sitting on right?

Zack: Yeah.

Matthew: But one of the nice things from a prospective subscriber to one of these strategies is you can really see all the broken systems in his past and make a more informed judgment about the value of the latest methodology.

Zack: Sort of like a scorched earth policy. So, I think you were a little humble when you were describing what it is. So not only are people publishing and other people following them, you’ve also built-there’s a revenue model associated with this. You’ve built a marketplace of these types of trading systems, right?

Matthew: Yeah, I think from a, you know, pure business analysis point of view, one way of looking at it is it’s a marketplace. It’s almost like an eBay type of marketplace where there are buyers and sellers of intellectual property, a very narrow vertical niche of intellectual property, trading methodologies. And then there’s all these ancillary software and technology services that make the stuff valuable. So it’s great if you have a trading methodology and you kind of “publish” it on the internet. Like maybe you blog about your trading strategy and you make your picks, you know, on a blog. But that has less value just kind of propagating out into the ether than a platform where people can, number one trust the result.
But number two, if they do like the results, they can turn on automation in their account and actually benefit from it. So we have all sorts of cool technologies where you can build portfolios of different trading methodologies at different weightings and scales and you can track your results and you can- I’m trying to encourage more sharing of information across the site, more transparency in the sense that you can let other people know what you’re trading and how well you’re doing. I like that idea. I thought that would be a big hit among the users. And it’s kind of interesting, I don’t know what to make of this, exactly. It hasn’t been-I’ve offered it to a lot of users, the ability to do it, but most people don’t want to share their trading results. They really want to keep them private and I don’t know if that’s embarrassment or, you know, people want to keep good things to themselves or maybe a little of both.

Zack: Right.

Matthew: But in any case, yeah so it’s a marketplace where . . .

Zack: And they could also be incubating ideas, right? I mean, they could be testing systems as well.

Matthew: That’s right. And we have, in the for what it’s worth department, we have the ability for users who want to come to the site and just sort of fool around with it to create what’s called a test system, where they have to declare it a test system and then they can just kind of screw around with the platform and test it out and no one will ever see those results. They’re kind of private forever. And so that’s a great way to come to the site and see if it’s right for you and then you don’t have to commit to publishing that track record and you can walk away from that. But once you do commit to publishing on a go-forward basis, that’s part of your identity on the site for forever.

Zack: Can you give us a little flavor, Matthew, on who are the publishers and who are the subscribers? Like, what’s their character–how do you characterize them? Are these professionals? Are these sort of like stock jockeys in their underwear? What does your user base look like?

Matthew: Well, I think it varies a little bit by instrument class. So one of the nice, or cool things about Collective 2 is we try to cover every instrument class that, you know, most average people would consider trading. That includes foreign exchange, over the counter Forex, futures, options, equities and that’s really it. ETFs are, I guess, counted as equities on our platform. And I think the user base varies a little bit by instrument class. I think that my, you know, as a businessperson I’m incredibly interested in who the users are and I want to understand them as much as possible. It’s a really hard thing to figure out. I mean, it could just be that my data gathering and my tool sets are just not up to the challenge.
But I think it’s just really hard because there’s a lot of different kinds of people. I’d say that the groups of people are probably wealth-, in the world of stocks and futures, I have found that I think the demographics skew a little bit older, male, and wealthier. People that are sort of on the tail end of their career or in a kind of active retirement, investing, using this platform. They feel empowered by it. This is gross generalization and probably horribly untrue-but they seem to be people that maybe had entrepreneurial backgrounds themselves, or at least were business leaders [inaudible 19:30]

Zack: Sort of like early adopters, in a way?

Matthew: Yeah, it’s those technology early adopters but more, I think the point really, to me, is that they seem to be people very comfortable taking control of, say, their investing. They don’t- , so it seems to me. You know, so one way to look at Collective2 is it’s a site where you sort of subscribe to a trading system and it automatically does stuff. I don’t think that’s how our users think of it. I think our users think of it as they’re taking control. They’re deciding which trade, we literally have tens of thousands of strategies available on the site. And you know, admittedly, most of them are bad.
But we also have tools that allow you to kind of sift through that relatively easily so that you can find the several dozen or maybe hundred or so good ones. And I think people really enjoy, it’s a very fine level of control, much more so than, say, choosing an ETF or two to trade in your Ameritrade account. It’s a way of empowering people and keeping them in control. And, you know, the other nice thing in terms of power and control is it’s your trading account. It’s not like you hand over your account to some manager or something. And it’s not like you’ve signed a check to a hedge fund and then your money kind of is out of your hands forever. It’s your regular, say, optionsXpress trading account. And you can see the trades going in second by second, minute by minute. And we have the ability to control those trades.
So, sure, it’s called automated trading but at any given time you can say, that guy, this trading strategy is really stupid. You could either turn off the strategy in an instant or you can close particular trades. You can make certain trades bigger. I think it’s a way of empowering these people and that’s why I think, to answer your question, Zack, the people that like that are generally, with some notable exceptions, it does seem to skew to be a very male user base. I don’t know what that means, necessarily. And a slightly older than middle-aged user base as well.

Zack: That’s like why do bank robbers rob banks? Because they go where the money is. It could be. So I’m curious also. I stumbled upon the fact– you were upfront about it initially–Youtual funds. You’ve separated the site. So, I mean, I don’t think there’s a lot of intermingling, let’s call it. How do you segment those two? Obviously you saw the need to create two different sites. They do something very similar. Can you talk about the difference between those two?

Matthew: Well, I think a couple of different things caused us to start a second site. I mean, on just one level there were a bunch of nifty, radical ideas that we had that we wanted to experiment with that we couldn’t shoehorn into the Collective2 business model. And specifically, what I think was really interesting about Youtual Funds, or the idea we had here at Collective2 was, well what if everyone-what if we kind of broke down the barriers between people that are “subscribers” and people that are publishers. What if everyone’s brain was sort of used in some useful way so that, you know, there are some people that are good at, for example, picking stocks. And maybe there are some people that are really good at picking people that pick stocks.
So because our original idea was to say, we have a bunch of power users on Collective2 that seem to be doing really well in their trading account. They’re good at picking automated strategies on the platform. Is there a way that they could share their expertise? And, frankly, we just couldn’t figure out a way to make that work technically or in a business model of the Collective2 site.

So we started a second site called Youtual Funds where the metaphor, we needed a kind of an intellectual metaphor for the site. But everyone on the site gets his own symbol, like his own stock symbol. And we tried to make the interface much less technical, much more simple to understand because, you know, this isn’t about technical analysis as much as it is about stock picking. So we have an interface where you just kind of pop down into the site and you have this big pie that you get to allocate among all the stocks you’re interested in. So, of course, I’m a technology buff so I would pick–I don’t know–40 percent of my pie would go to Google and 30 percent would go to Apple. And I would allocate my pie and I’d write a little not explaining why I think Apple and Google are good and why I want the let the rest of my pie stay in cash.
And then, so my symbol, the Matt symbol or whatever my symbol is, anyone can come and see that pie. And then, where it gets kind of cool is the idea that then someone can say, this guy, Matthew Klein, he’s a genius. I happen to believe that many people would say that. And they would look at my pie and say I want to own his system in my pie. So when they allocate their pie, the can choose to buy a little IBM but also to allocate 50 percent of their pie to Matt, to the symbol that I created. And then, so maybe there are experts that are good at picking people in addition to picking stocks. So that was kind of the, revolutionary is a big word. That was the incredibly cool idea that we were trying to experiment with on Youtual funds, this idea-we call it is recursive portfolio allocation where you can own people’s pies as a slice of your pie.

And in turn, someone can own your pie which owns another pie, and so on and so on. So this was the sort of the big radical step that we took in Youtual Funds. And you can see why that’s really, you know, on some level they’re both sites that allow people to invest in some sort of methodical way. But you can see why it’s a very different experience.

Zack: Did they experiment work?

Matthew: Well, I would have to say the jury’s out. I mean, every entrepreneur wants everything he touches to be golden and to be a huge success. I think that Youtual Funds wasn’t as big as we hoped it would be. It wasn’t as obvious as we hoped it be to people. And so, I mean it’s a site we love and we work on so hard every day. But I was hoping for millions of users every day and I think we’re orders and magnitudes away from that. Whether that changes as a result of this podcast or as a result of a gravitational shift in the earth or whatever. Who knows. But one of the other reasons we started the site was to be, to have it be a test bed for new ideas and new business models, a new user interface experiment.
So some of the stuff we actually worked on in Youtual Funds, we brought over to our main site, Collective2. I mean this is all probably stuff that most people aren’t interested in. But from an entrepreneurial or software design point of view, it is kind of interesting to run two different sites and to try to have one that’s more of your experimental site and then you can bring the stuff that works over to the big one. And that’s pretty much what we’ve been doing with Youtual Funds and Collective 2.

Zack: So just, I don’t need numbers, but in terms of relative size, Collective2 is sort of the mainstay site and I assume most of the activity is happening over there. And Youtual Funds is still just sort of searching for the large, mass audience?

Matthew: Yeah, I mean, I think that’s really fair. I mean, I personally, I dislike listening to people never talk about their lack of success. Actually, you see, there I go.

Zack: Well, you attacked, you attacked the newsletter industry, so.

Matthew: Well, right. I guess what I mean to say is, look, to be really honest, no. The Youtual Fund site has been much less used than the Collective2 site. And it’s really hard to say what that is. Is it just an idea whose time hasn’t come? Is it an idea whose time never will come? Is it bad marketing? Is it a bad user interface design? I mean, there are a thousand fathers of every failure, right? So who knows what it is. But the way I consider the site right now is we’ll keep plugging away at it and it’s a great test bed. And there are a bunch of users who do seem to love it and are really emotionally attached to it and I don’t want the site to go anywhere. But to answer your question, Zack, yeah, Collective2 is really the main engine of my little company’s growth and that’s what we think is a big success. I mean, that one we don’t have anything to be ashamed of.

Zack: How many systems do you have up? Can you share that?

Matthew: Yeah, I think it’s really on the front page of Collective2. Now, it’s one of those things where you put a big number up and it’s completely honest and real but it really does need a little bit of explanation. I think, actually, yeah I’m just going to Collective2.com right now and it says we have 18,010 trading systems in our database. But just to kind of fully disclose . . .

Zack: I assume most of those are not active.

Matthew: Yeah, a lot of them are not active. But it’s something we talked about, touched upon earlier. There’s some value in keeping in your database all the failures that people strew along the roadway on the way to their success. So there’s that. There’s the fact that one of the things you asked me earlier, Zack, like who are the customers on Collective 2? Who are the people that create trading systems? Who are the people that trade? The people that create trading systems, you know, one of the really powerful and amazing things about the site is that we’re open. Anyone can come to the site and propose their trading methodology and be tracked and. . .

Zack: No credentialing required.

Matthew: That’s right. If you have a couple of nickels to rub together, it’s not a lot, you just sort of start your system and there you are. You’re on the site, you’re right next to everyone else who might. So, if you’re a Harvard MBA or. . .

Zack: Egads.

Matthew: [inaudible 30:09] math major, you’re right next to the same guy who’s working in the Moscow basement and living with his mother in Moscow. And I think that’s really cool and that allows, I mean it removes a lot of friction and barriers in the world of finance. It doesn’t really make a whole lot of sense to me, personally, that you need to go to Harvard and work at Goldman in order to be someone who writes trading methodologies. Although, that is effectively the way the financial world works today. I mean there’s just these big barriers to regular, everyday smart people participating in the world. And I think Collective helps break down those barriers.
So there are a lot of systems. And one of the downsides of opening up a platform to the entire world is that you get a lot of crap. And so out of those 18,000 systems, I won’t even venture a guess as to saying what percentage is crap, probably a lot. But there’s value in that and as long as we, as programmers here at Collective2, can make it so that people can fairly easily kind of hide the crap and get rid of it really fast off their screen so that all they need to look at is the good stuff, we’re find with that.

Zack: Okay. I just have a couple more questions. So we’ve got this marketplace. I’m curious how Collective2 makes money, right? From what I’ve seen, you charge, I guess we call them trading system managers or whatever, a fee to publish on the system if they want to share it? And also the ability to make money by doing that. So I assume you take a piece of that.

Matthew: Yeah, I mean the pricing is not at all secret. It’s right out there on the website and we publish it and everyone can come look at it. But it’s basically, this is the business model. A system decided to publish there, it’s like a hundred bucks, not even, to turn it on. And then to the extent you take subscribers, we have 50,000 active users who use the site. And to the extent that any one of them sees your system and says, oh yeah, I’ll subscribe, you set your price as a system developer. You can say I want to charge, oh $10 a month or you can say I want to charge $500 a month, whatever you want. And then Collective 2 takes 30 percent of that as its fee. And that’s essentially, there are other ancillary things going on. There’s some advertising. There’s some marketing. But that is effectively the business model of Collective 2.

Zack: And the advertising and marketing is internal. Meaning if I had a model and I want to, like I would do on eBay like you were saying. That was the metaphor you were using before. If I want to just sort of help boost the people seeing my system, I can advertise within the platform.

Matthew: Yeah, that’s right. I mean, again just in the interest of full candor, I mean I don’t think that amounts to a whole lot in terms of the revenue stream for my company. But yes, you could for example get more, let’s call it more effective placement. If you started a new system and you really wanted to make sure that the right people saw it, you are very proud of it and you didn’t want to wait for them to sift through a database to find it, you could kind of feature your system for some nominal fee. But that’s hardly even, I mean, certainly I’m happy to talk about it but that’s not really a big part of the business model.
The real model is frankly, is the ability to get subscribers on the platform and when you do and when you are successful on the platform, that’s when Collective2 gets its success. So it’s a pretty nice model. I mean, you don’t really risk a whole lot to start out as someone who’s being a trading system developer. And similarly, as a subscriber to the systems–if you come to the site and want to just be a subscriber–a lot of the systems offer free trial periods and the ability to kind of just fool around with the system. And we have a really nice simulated brokerage account ability.

So you don’t even need to bring your own brokerage account with you. If you don’t have one, you can use our sim broker, or simulation broker. And it’s really like you have all the same features as you would if you brought your real broker account with you. You see your daily statements and you see how you’re doing and you can affect your autotrade. And so it’s a nice way to experiment. Of course, I should just say for regulatory purposes, of course, a simulated broker is not the same thing as a real broker. And if you make $1 million in a sim broker, that’s not the same thing as making money in a real broker. But it’s a cool thing to experiment with.

Zack: Are some of the, I’ll call them model managers, are they making real money or is this sort of like just ancillary to what they’re doing? Have they quit their jobs? I mean is this like a full- time thing for some of them?

Matthew: Well, look. In any business, in any intellectual property business, there’s kind of a long tail thing where there’s a lot of people making an okay amount of money and then there’s a group, a cluster of people that make a ton. I’m a part-time novelist as well, so I write books in my part time. And I am one of the guys on the right side of the tail who, you know, I ain’t paying the mortgage with my books but, you know, I enjoy doing that. And similarly I think the James Pattersons of Collective2 make, they do really well. I mean, there’s a bunch of them, more than a handful, that, I don’t know where they’re living and if they’re living in Manhattan, you know, maybe it’s not- it’s a good living in most of the country, what they’re doing.
And so I think the site is growing. We’re getting new users every day. And so it seems to me- and there are people that are making a lot of money publish their models. I think what I have seen happen is some of the very successful ones-I mean, I don’t promise this and it’s really not part of our marketing spiel at Collective2, but it does seem like some of the more successful ones sort of get snatched up and create a hedge fund or they sort of take their models and turn them private after achieving a lot of success. I think it’s the kind of thing where you can do really well, if you have a good model. It’s not overnight. It could take you six months to build a following. It could take you 12 months to really start making a ton of money. But then the really good ones kind of get taken away from us. So from my perspective, that’s a business challenge. From the perspective of someone coming to the site, it’s an opportunity.

Zack: Right. I guess, according to the model, you’re sort of like a farm league for investing ideas. All right. So somebody can come in and sort of mature through the system and you have to expect that, at some point, they graduate beyond the platform.

Matthew: Yeah, and I hate that. I really feel if I could only sign people to lifelong contracts and subject them to servitude, that it would be much better for my business. But, yeah, you’re right. I mean, that is sort of effectively what happens to the best of the best. And it doesn’t happen right away and it doesn’t happen all the time but it certainly does happen and it’s just part of the way we have to make our business work.

Zack: Last question, and it’s a personal one. You said you built this platform to sort of scratch an itch of yours. Are you a trader by background? You’re a novelist, you’re sort of like a renaissance man. How would you describe yourself?

Matthew: Well, how would I describe myself is probably a lot different from how my wife would describe myself, as it probably takes with everyone.

Zack: It’s a family program.

Matthew: So, yeah this is one of those weird things where I grew up in a house where my dad was, he was using technical analysis back when there were, I think they were called the TI-59 programmable calculators. For those of you who remember those, were little calculators that had magnetic cards you could put through the calculator and you could store a program that had, like, 20 instructions on it, or something like that. And he was using that to trade futures. So I grew up in a house where technical analysis and trading was just something that people talked about and did which was kind of slightly unusual. And I guess, I have been a trader for many years and that was what led me to start Collective2, about a decade ago at this point.
But at this point, running, it’s a small company, admittedly. But for me, it’s my whole life. So running that company takes up so much of my time that it’s very hard for me to even consider trading at this point personally. So I am a reformed trader, a retired trader, maybe is the right word. And now I just spend my time trying to build a great platform for other traders.

Zack: I lied. I have one more question. Can you talk about maybe where you’re going to be, and whether it’s just Collective2 or Youtual Funds where, some of the things on the road map, on the product road map. I guess where you’d like to be in a couple years.

Matthew: Well, obviously, when you do something for your life you want more people to see it rather than fewer people. It’s not even about money, although of course if someone starts a company you want more customers rather than fewer customers. But I think that systematic trade-well, let me step back for a second. I think that most of the world is getting ripped off in the world of investing, trading. I think people are sold products that are not right for them. I think that people spend too much money and lose too much trading. I think people make bad decisions. They generally make worst decisions they can make and the primary cause for those bad decisions is A), lack of knowledge and B), following human emotions. And I think emotions kill you when you trade.
I think you really, as an investor, should consider one of two possibilities. One is have some sort of investing thesis, make a decision, execute that decision in your account and then don’t look at your account for 10 years. That’s a viable strategy in my mind. The other strategy, and that’s a viable strategy, but it’s hard for most human beings to do, I think. So if you’re not a Vulcan and you can’t really follow that advice, I think they next idea to consider is to try as much as possible to eliminate emotion from your decisions. And I think it’s not quite there yet but I think that a platform like Collective2 helps people do that. I mean, it could be misused like every platform could be. It could help people make bad decisions. That happens. I can’t deny it.

But my goal, to answer your question, the goal is I would like more people to be able to understand what Collective2 is and to use it. So from a design and product development road map point of view, my goal is to try to make the site-it’s hard to do-but more user friendly, more obvious. I grew up with a father who traded and who explained to me all these technical analysis terms. I think that the legacy is still there in the site and I think that the regular Joe investor probably comes to the site and his eyes glaze over and he falls asleep at his computer. So I think my job is to make that a little less daunting, a little safer, a little more obvious. And if I can do that at the edges a little at a time, in a few years maybe the company will be a little bigger and we’ll have even more happy users. That would make me really delighted.

Zack: Awesome. Matthew Klein, founder of Collective2.com. Thanks for joining us on Tradestreaming today.

Matthew: Thanks, Zack. It was great.

Announcer: You’re listening to Tradestreaming Radio, with your host, Zack Miller. Expand your mind, become a better investor with tools, tips, and technology from the smartest investors on the planet.

Zack: Welcome to Tradestreaming.com. This is your host, Zack Miller. This is the place where investors come to get tools, tips, and technologies to make better, smarter investment decisions.
Today’s guest is Blain Reinkensmeyer. He runs Stock Trading To Go, but he also runs StockBrokers.com, and I invited Blain to talk about the Online Broker Review of 2012, it was a scorecarding, a benchmarking of the best and the worst of the online brokers. I wanted to know a little bit about the individual brokerages, but I also wanted to learn about some trends that he was seeing in the industry. So this is a great episode if you are in the market to get a new stockbroker, to switch stockbrokers, or just to get a feel for what is going on in the online brokerage space.
I hope you enjoy the show. You can get this episode as well as all of my archives at my website, Tradestreaming.com. We will also have a transcript of this program as well as the rest of my episodes. You can also find this program on iTunes. Feel free to sign up for my free investment newsletter. I use that newsletter as a weekly tool to help bubble up what you need to know to help make better, smarter investment decisions. Whether it is tools, tips, or technologies, or just specific industry trends, sign up there, it is free.
I really appreciate your time and your energy. We are getting a lot of new interest in Tradestreaming, particularly in the podcasts. I really appreciate it, and hope to speak to you soon.

Blain: My name is Blain Reinkensmeyer, and I run Stock Trading To Go and StockBrokers.com.

Zack: We are going to be talking about StockBrokers.com, because you have an Online Broker Review that you just published?

Blain: Exactly.

Zack: Is that a yearly thing?

Blain: It is a yearly thing. This was our second year publishing our full review, and we covered 24 online brokers this year.

Zack: That is amazing. That is a free report you can get at Stockbrokers.com?

Blain: Correct.

Zack: Awesome. I like the way you broke it up into different categories. So commissions and fees, I see Lightspeed is ranked highest. What are you looking for there? Just the lowest commission, lowest fees across the board?

Blain: Yes. For commissions and fees, we are looking at what it costs to make, whether it be your regular stock trade or options trade, do they have miscellaneous fees? So we kind of dug in and said, hey, what is in this size eight font at the bottom of these pages? It might publish a specific rate, but is that really what I am paying for in the end when it is done? Then also, does it cost more to trade after hours, or what about penny stocks, OTCBB, all of those came in to play for commissions and fees.

Zack: Interesting. Have we seen the end of fee erosion? There was a time when – I remember when Zecco launched and they were doing this ad-supported trading and stuff like that. That seems to have gone away.

Blain: Yes, you are exactly right. There was a period of time when you saw the rise of the discount brokers – and Zecco would be a good example – saying, ‘We are going to have free trades for everyone’, and this whole movement, but what has really happened over time, and especially in the last year or two is these brokers are realizing that this is not just about cheap trading, there is the overall client experience as well, and that was one of the big themes for our review this year. So a lot of these discount brokers have raised their commission rates, even if it is a dollar or two over the last few years, but that allows them to put that extra capital into building out a good platform or offering more tools or research and increase the overall experience, because competition is very tough out there.

Zack: I can imagine. Is there somewhat of an inverse relationship…like you said, if somebody is really cut-throat on fees…so interactive brokers – I don’t want to besmirch them in particular – but they have a reputation for really great technology, really fast trading, really cheap, but not necessarily the greatest if you have any issues with your account. Is there an inverse relationship between fees and customer service?

Blain: There is and there isn’t, actually. When you talk about a broker like Interactive Brokers or even their competitors, whether it be TradeStation or Lightspeed, they are more or less in the active trader niche. So when it comes to customer support, actually we found that with these brokers, it is so competitive for quality, active trading clients, or heck, even institutional clients, that customer support is always spot on. But there are some of these brokers, like Interactive Brokers, you have to really dig in and see how much it really costs because they have a great discounted structure where you get $1 per trade, that is fairly common on a per share basis. However, for the average investor, you really need to spend $30 in commissions per month to negate. They have a $10 fee for real- time quotes, so there are two fees of that nature. So it’s like, hey, you have to spend $30 on commissions or you’re going to end up paying up to $20. That comes into play with these heavily discounted brokers, and that is something that we look for. If you have a straight-forward, flat-fee structure, then that is easy for the client to interpret, it is easy for them to look at and know what they are paying for and what they get, and we gave a higher score to those brokers because of that. It is all about transparency, right?

Zack: That is awesome. One name that is conspicuously missing from the best- in-class in terms of commissions and fees is a company that I remember using almost 20 years ago now, ShareBuilder, which was the easiest way for somebody to get involved. If they had $50 a month, you could take it off your credit card and put it in directly and start buying fractional shares of ETFs and stuff like that. It always looked cheap, it was almost like a subscription fee, but when you look under the coverage, it is not that way?

Blain: With ShareBuilder, we actually did some interviews and talked with clients to give us even a broader perspective on what they experienced themselves, and what we found with ShareBuilder was if you stick to their automatic investing plans, then you’ll get discounted trades. Their basic plan is $4 for every automated trade, which means that someone goes on and they will say, ‘Zack, I have my retirement account here and I want to buy this mutual fund, this mutual fund, Apple stock, or whatever it may be, every single month, once a month, and my deposits automatically come in, so I want this.’ Do you know what I am saying? So they can just build it for…

Zack: You’re automated.

Blain: Exactly. It truly is, literally, automated. So if you stick to just that, then it is great. But where ShareBuilder really makes their money is when someone says, ‘Wait a minute, I want to sell Apple right now!’ They have two different plans, and you have to sort through that, sift through that, and ask how you get the most discounted commissions. With ShareBuilder, it is auto- trading. Beyond that, they are just an average broker in the commissions and fees.

Zack: Okay. What about a trend towards a subscription fee towards trading? Are we seeing this anymore? I remember a few years ago there was talk about it, almost like an all-you-can-eat type fee?

Blain: Sure. We haven’t seen it. The movement we have seen has been more on the per trade, flat-fee structure. A lot of that in almost all of the big brokers utilize a flat-fee structure, and even down to your discounted brokers, even the active traders, they will say, ‘Hey look, it is a flat-rate and you get this direct market access.’ The trend has really been to just keep it simple, this is what it is. I think that the brokers realize too that if they say, ‘Hey, you just pay this much’ and then you get unlimited free trades, that they are going to limit themselves dramatically because they are going to get those niche clients. It is kind of like data plans, right? I think AT&T just said, ‘Even though you get unlimited data, we are going to cap it.’ They realized that there are those heavy-use people, and I’m sure that is what Zecco ran into, for example, you get these active traders that say, ‘Sweet! Free trades, I am in!’ Then the next thing that you know, Zecco can’t, or any broker, or AT&T, can’t make it. It is not a viable business model long term.

Zack: If we can move on to ease-of-use and some of the things you found there, in general, are you seeing that brokerage websites are becoming more customer friendly?

Blain: Yes, definitely. It is actually one of the most interesting and fun areas to watch develop, and we’ve only done this two years, but obviously we have been trading and utilizing brokerages beyond that. Ease-of-use we feel is very important, because whether you are an active trader, for example, and you want to go on and make a trade, how does that trade ticket work? Is it easy to use, et cetera? To the average investor that just wants to go in and check their portfolio and see a graph of how that has changed over time, some brokers are really bad at this where they will have very outdated websites and the whole kit and kaboodle, and then you have brokers who have easy navigation, it is an all-in-one trade ticket, they will have a site-wide, almost like a little bar that will float on the bottom that they can do quick quotes. Those were all things that we looked for when looking at ease-of-use, and that has been the trend.
One trend, for example, would be customizable home pages. One broker, E*Trade, they had a really cool one they call E*Trade 360.

Zack: I was just going to ask you about that. They just launched that, right?

Blain: Yes, they just launched it. When we were testing, it was in beta. You can log in, you have the drag-and-drop functionality, you can see – if you just want to look at your portfolio balances, my allocation, or do I want to look at latest news, so they allow this drag-and-drop functionality. It is really clean. It is really intuitive, so anyone can use it and find it simple. There are a handful of brokers that have added that, and some are better than others. E*Trade was one that stood out just for the simplicity of how it works. Again, it is how do we increase or enhance that client experience. Heck, if someone can log in and see their portfolio, and then there is a quote on Apple, alright, wow, it’s up another 10%, I want to get on this upward parabolic run, they can just easily place that trade, and the brokers realize that that overall experience makes a big difference in the end.

Zack: I also think that in some way, the online brokers have sort of maxed out in terms of the early adapters, the techies, the younger people, and the growth now is coming from people leaving old- school wirehouse brokers, people who are used to having full service. I think to attract those people, the websites have to become even more user-friendly. They have to be extremely powerful, but on the other hand, they can’t overwhelm. They have to give the impression that people are getting this automated, professional grade service that they are used to, but getting it through a website now. I feel like the brokers have sensed that over the past few years and have really designed their websites to become much more like consumer websites than trading websites.

Blain: I agree 110%. You are always going to have your niche brokers that specialize in one specific area, but when you are talking about the overall experience, that is what we looked for this year. We said, ‘Who is the best overall broker when you look across all categories.’ We looked at eight different categories. So all of these eight different categories, you’re spot on, Zack, there is definitely a movement and they are seeing so much value in that.
Even down to little categories, one we covered was education, the brokers that offer those articles, glossaries, some of them have quizzes, archived webinars, and what they are finding is that they look, if we can offer our clients education, if we can educate them on some of these more advanced trade types or options, that is a huge trend. If we can educate them and they are comfortable with it, then they are going to trade it and they are not going to – like Forex, the wild, wild, west – they are not going to take on this heavy margin and then blow up their accounts. Do you know what I am saying? All of these little niches come into play with building the overall broker.

Beyond education, the ties in would be we looked at platforms and tools, and there is a big movement right now and a lot of competition for an easy-to-use, streamlined, fast, efficient web- based platform, so something you can use in your browser. From the discount brokers to even your TradeKing, Zecco, OptionsHouse, to your larger well-known names like TD Ameritrade, E*Trade, Schwab, the list goes on and on, but there is a huge movement into this space. Several years ago when tradeMONSTER came out, they were known as the best of the best. They had a sweet platform. You could watch their awesome flash video that looked so cool. Now they are realizing that, whoa, wait a minute, TradeKing just came out with TradeKing LIVE last year, and Zecco just came out with their streaming platform, which they are going to continue to enhance. OptionsHouse is on OptionsHouse 2.0 now, and that is really easy to use.

Our winner this year that swept it was TD Ameritrade. They acquired thinkorswim several years ago, and thinkorswim was known for being the platform used for active traders, and I think bringing over that talent was a phenomenal move. So not only is thinkorswim -it’s desktop-based, you have to download it – but not only has that continued to evolve, but then you look at their new web-based platform, new as in the last year or two, it is called Trade Architect. Zack, when you play with this platform, it is just an unbelievable client experience. It is seamless between screens, you can watch CNBC, when you look at your real-time streaming quotes, it is not just the last price and volume, they have quote trends and how close is it to its 52 week high. It’s drag-and-drop friendly, and it is just really impressive.

There is a huge movement, and that is a big theme when we are talking about the overall client experience. But platforms and tools, it goes beyond ‘Here is your latest quote, and by the way, you have to click refresh to get a 15 minute delayed quote.’ Do you know what I am saying? That just does not cut it anymore. That is what we are actually pretty excited to see, because in the end, it benefits the consumer, it benefits us as clients, as investors, because there is always another broker out there putting a lot of money and time into building the next best thing, and so that is a hot area that we are really looking forward to seeing evolve here in 2012.

Zack: Blain, can we talk about the investor community? This is something that I have written about in my book that came out in 2010 about the social aspect of investing. It is also one that I think the hype was a lot greater than what the reality was, like most things are in life, I guess. What has happened there? You had Zecco and TradeKing, which were the next-generation of brokers that launched with communities, and that was a core part of their product. Are they still pushing that as much? Are customers looking for that type of thing? Are the bigger brokers getting in there?

Blain: That is a great question, you are spot on. Zecco and TradeKing really were the forefronters, if that is even a word, on the forefront of this trend when it kicked off.

Zack: It should be a word, actually. I am going to write it down. You heard it here first, folks.

Blain: TradeKing really launched with the community being a big part of their site, and it was the same thing for Zecco. They launched with zeroed out trades, but it was all revolved around this community of investors, so they have stayed in the game. I have seen the trend change for them, though, on whether it be raising commissions or tweaking commission rates to appeal to a wider audience. For example, TradeKing now has two structures for options trading. But on the community front, they have proven that it is successful because now you look at E*Trade, optionsXpress, even Fidelity ties in community sentiment, whether it be on the most basic level, ‘Hey there is X amount of people holding Apple stock’, to you go to a quote screen and it will say, ‘Do you think Google is going to go up or down tomorrow?’ So there has been a movement now from the bigger brokers that have said, ‘Hey look, these discount brokers are doing this, and you know what, maybe this is a trend that we should invest some capital into.’
But to your other question, is it something that is a game changer? Is this really going to say, ‘Hey look, I have the best investor community, here are all these new clients for me.’ I don’t personally think so. I think that it is something that adds an extra functionality, it adds that extra little uniqueness to when you log in and you are doing research, but you know, Zack, am I going to look at Apple and say, ‘Oh, 99% of owners on X site feel that it is a buy’, am I going to say, ‘Oh great, I need to buy Apple’? In the end, that is not the case, so I think it is limited. It is cool to see it, it is cool to use it for research, it is great to interact with other traders, but over the next several years, I feel that it is limited from a brokerage standpoint of really bringing in something so unique, something so game changing that it is just going to draw clients from all of their competitors over to them.

Zack: Interesting. I totally agree with you as well. First of all, to have launched TradeKing and Zecco with the community aspect, that was a differentiator. It set them apart from the big boys, it was a great way to get in, but as time goes on, I think they are still trying to figure out how that works, and yes, it doesn’t bring you a whole slew of customers right away, but I think there is value there and I think that they see there’s value there. It certainly keeps people engaged, regardless. If you own a community as a broker, if you look at brokerage as a commoditized service, it is one of the only ways that you own your community, right? It is a differentiator than other sites’ communities. I still think it will be important, you are right, but sort of as an ancillary thing.
One question I have is you don’t see Merrill Edge in here that much in terms of the top rankings. Why do you think that is the case?

Blain: Merrill Edge, actually, they have brought on some key people. I know that they have just hired someone away from E*Trade, I believe on the product side. Merrill Edge has made steps, and I should say they have made big steps, so this year…

Zack: To be fair, they ranked number 10 on your overall?

Blain: Yes, they are number 10.

Zack: They didn’t get into the top five for any of the categories that you tested for?

Blain: No, they were not a best-in-class finisher, but they have made significant steps in what we really enjoyed over this year versus last year. For example, when you log into the site, it is much easier to use, customer support has been kicked up a notch. They have really made good steps in all of these little niche areas, platform and tools, research, it has definitely been across the board. Actually, Merrill Edge is one of the – I don’t want to say surprises for us – but it was one of the brokers that stood out for the improvements it made when you look at a year-over-year trend.

Zack: Do you think they hit best-in-class next year maybe?

Blain: Maybe. We will have to see. We will see how this new E*Trade guy turns out for them. They are definitely investing in that right, so they are bringing in the right people to make that happen. It is going to be something that remains to be seen. They actually are one of the brokers that you can get free trades. I think it is like a $25,000 balance through Bank of America, you can link it to Bank of America, and they are one of those brokers that ties in really well with the banking side. It is an interesting offering overall, and it is definitely something that has improved. So they may not be best-in-class this year, we will see how they turn out next year, but they are significantly more competitive than they were a year or several years ago.

Zack: Very interesting. Are there any disappointments from your perspective? Any sites you think should have ranked higher but didn’t this year?

Blain: Well, that is a good one. I try not to [indiscernible 22:17] on this case.

Zack: You don’t want to pick on anyone? You’ve got to be friends with everybody, right?

Blain: Yeah, there you go. We definitely picked on brokers throughout the review, and for us, it is really cool because we are pretty hard on the brokers and what is great about it is that the brokers will come to us after this and say, instead of ‘what is this ranking?’, now they are coming to us and saying, ‘Let’s have a call. I want you to talk to XYZ. We want to find out how we can do better in these categories.’ It has actually been a pretty sweet evolution for the stock brokers that [indiscernible 22:57] brand, because now we are literally helping all of these brokers, if they want it. Some brokers just say, ‘Hey, we performed poorly, thanks for nothing.’ Do you know what I am saying? It is completely unbiased. It’s not like we go here and say, ‘Zack, do you want to go have a sandwich? Tell me about your website. Oh, this is great. Number one.’ That is not how we operate. Do you know what I am saying? We have very strict material that we look at and how we are grading, so in the end, we are helping all of these brokers get better with our interviews and reviews that are being conducted.

Zack: That makes sense. That is a great methodology.
I’ll ask one, I guess it is an easier question, I guess, not to put you on the spot. Charles Schwab ranks number five overall. Pretty good, four or five star rankings throughout. Okay price, commission and fees, they are not necessarily competing there, so they got a two star rating. What surprises me are the two stars in education for Charles Schwab. Have they not invested enough there? Is there an offering in the works that they are putting together to get better in the education piece? Why are they missing that? Does that make sense?

Blain: Yes, it makes perfect sense. On education, each category, and in looking at education, we look across the board. Do they have a glossary? Do they have articles? A big one for us is organization of content, if I can go to an education center, Zack, and see an old-school Yahoo homepage where back in the day there were ads everywhere, not ads, but content everywhere.

Zack: Like a big billboard?

Blain: Yeah. As a new investor, that can be overwhelming, and then immediately I click off that education center, I am not even going to mess with it. Do you know what I am saying, because it is so overwhelming to me? So we say, look, that is great that you do webinars or offer coaching, in some of these brokers’ cases – Schwab obviously has a great staff of professional advisors – but do you organize your content based on beginner, intermediate and advanced? The brokers who did the best this year, E*Trade and TradeKing, were two standouts there – they are always neck-and-neck each year – you can go on there and say, I want to watch a video for advanced traders on this concept, click, click, done, I am watching it. It is about that whole experience, and some brokers you can always get on the phone or you can always talk to them, but they don’t have a glossary, they don’t have in-depth articles, it is still limited in the end. So beyond each star score there is a point in the end, a bottom line numerical score. We look at two parts, do you have a glossary? Okay, how thorough is it? Okay, you get points. Then on the overall, and that is a big part that comes into it, when I go to that education center, how quickly can I find what I need to find and how confident am I going to end up? Am I going to end up coming back, like we talked about earlier, or do I just look at this and say, ‘Nope, it’s overwhelming, what is this? Options, covered call strategy, I can’t do it. Nope, I’m done.’
I guess Schwab, in that sense, they get two stars because they are missing that overall. If they could put more resources into making it more intuitive and helping focus on different skilled set investors, then they definitely can bump up that score. We invite them to talk to us because there are a lot of different third party providers that can really enhance that overall offering and make it better for their clients.

Zack: Awesome. One other question I have is you have 4 five-star ranking brokerages, 5 four-star rankings, and what we see are star ratings. How close in general are these companies to one another in terms of your scoring? I don’t need the exact number, but when somebody ranks higher than someone else, are we talking about just a little bit better, are there big gradations, big jumps? Or are we seeing clustering where they are all really good, and it is just a matter of little things here?

Blain: That is a really great question. It is actually a lot closer. It might be four to five stars, so we take all of these numbers for each category, and then we take a weighted score, we average all those out, so like commissions and fees, ease-of-use, platforms and tools, those are all 15% of the overall score. Then once we compile it all, we get an end numerical score which translates into a star rating. It is very tight. For example, TD Ameritrade and E*Trade this year, it literally came down to…

Zack: Neck-and-neck, right?

Blain: It was so neck-and-neck. The difference, TD Ameritrade literally won the show with Trade Architect. It was a web-based platform that gave them the extra few points, and that was that.

It can be extremely tight. In particular with these three-star brokers, too, it is hard because we do an overall ranking and you might look at a three-star brokerage and say, ‘Oh, it’s only three stars, I want to go with a five-star broker’ but that is not always the best choice. A lot of these three-star brokers specialize in certain areas, and they are fantastic choices.
We were talking about ShareBuilder with the auto-investing. If you want to auto-invest your money, ShareBuilder is a great fit. You are going to be a happy client. OptionsHouse was the only broker this year that got five stars for commissions and fees and five stars for ease-of-use. We love the platform for that, so if you want cheap trades and you want an easy-to-use experience, OptionsHouse would be a great fit. So even though they may have gotten three or four stars, you really have to dig in and see what do I want as a client, and as a result, these scores get really tight because some of these brokers are in niche areas and it can come down to customer support. We can get into that next, Zack, because there were a lot of funny calls we ran into…

Zack: When you say calls, you were actually picking up the phone, you yourself, or someone on your team, was calling support to get a feel for how knowledgeable they were or how useful they were?

Blain: Exactly, and we joke about it, we almost tease the brokers because we will call at random times, we will call on the weekend, we will call right when the market opens, we will call during the day. What was cool this year is that we upped the ante a little bit and so every single call, every single email, every single live chat…

Zack: Now did you disclose that you were testing them?

Blain: No. How it works with the brokers, we’ll say, ‘Hey look, we’re going to be starting our review, it is over the next several months, we’re going to be testing you guys. There is no heads-up on when we are doing these calls or doing these emails. We will go and open accounts and act as an actual client’. Zack, when I open an account with your brokerage, are you going to call me up? We would purposely leave out information. We would purposely leave out a license, for example. Are they going to follow up and say, ‘Hey, Blain. It was nice to meet you. Blah, blah, blah’. So we let the brokers know, ‘Hey look, over the next several months we are going to be conducting all of this in- depth research, et cetera. If there is anything specific that you guys want to make sure that we test…’, because every broker can go so in-depth with the tools, the research, et cetera. That is basically their one opportunity to say, ‘Yes, please make sure to test this tour. Please test this new platform,’ which we are going to test anyways, ‘Please make sure you look at this.’ Then from there on out, we joke that we are messing with the brokers because we will, no matter what time of day or where it might be, and it gets really picky and stringent on what we are looking for, and you either have it or you don’t. When it comes to review, there is no buddy-buddy. It really comes down to the wire. I’m a trader, what experience am I getting, and why do I want to choose you?
For customer support, for example, on the phone side we had some brokers who did very well, like TradeKing. It doesn’t matter if you contact them on customer live chat, email them, or call them at a random time, it is always like, ‘Hello, how is it going?’ You get an instant pick up, it is an overall, across-the-board, it hits the nail on the head. Then you have a broker like SogoTrade, it was the oddest phone call support we had where we called to test them and you get the standard, automated, you are going through the menu and then it says that you are waiting for a rep, you are caller number three in the cue. Okay, caller number three, that can’t take that long, right? So then every 30 seconds this machine would come on, it became pretty annoying, there was no music, it was just, ‘You are caller number three, you are caller number three.’ We got bumped up to caller number two, then we got bumped up to caller number one, and it said, ‘You are the next caller, be prepared for a rep.’ We thought, okay, cool. 30 seconds go by, and then it comes back on again, ‘You are caller number two.’ We were like, ‘Wait a minute!’

Zack: You got demoted!

Blain: Exactly! It actually happened twice, Zack, over the same call. So we got bumped back up to number one, and then we were back to number two, and it ended up taking 12 minutes. We tracked this down to the second, how long it takes us to end up connecting to a rep, and thank gosh, this rep was really helpful. They answered all of our questions, because we try to catch them there, too, Zack. We will say, ‘Okay, how much is this commission?’ Something simple, but then we will ask something like, ‘Well, can I place an advance order?’ One of the big things we were looking at this year, ‘Can I place contingent orders?’ The reps will, for the most part, be able to answer that, and then we will ask something even more detailed like, ‘On this platform, how does this tool work?’
We ask three or four questions on average, and really try to catch these guys to see how well they know their website or their software or maybe their commissions. It really gets peculiar, because some brokers are like, ‘Oh, let me go find that out.’ You can really dig in and see what they know by acting as a client and asking the tough questions to the easy questions.

Zack: Do you think – it is a good question, so I am not picking on SogoTrade – but I think obviously to be good at service, as a broker, you have to be able to connect with people where they want to be connected, whether it is email, phone, or online chat. Are there certain brokers that are funneling towards a certain communication medium? Like maybe they are good at phone, and they want you to call in through the phone because that is where they are staffed, and try to sort of push you away from other ones, other mechanisms? Does that make sense?

Blain: It makes perfect sense. The answer is definitely yes. Not all the brokers offer live chat support, and some of them don’t even want to. If you look at a broker like Schwab, TD Ameritrade, or E*Trade, Schwab really stands out to us. They always just blow us away with their phone support every year. You can call them whenever. I think we called them at 8 o’clock at night on a Sunday, and they were like boom, ‘Hello sir’. They’ll know your name, they’ll use your name. We even grade them on how well their exit is, are they friendly, are they saying, ‘Oh Zack, thanks so much for calling in, if you have any further questions, feel free to contact us. Have a wonderful evening.’ Do you know what I am saying?
A lot of these brokers will offer email. Email and phone is probably the most common combination you will see. There are definitely the brokers that you can tell, their number is throughout their site, they say, ‘Call us! Here is our number’. And when you call, if that was the case, and we could tell that the broker was centered around phone support or email, then we expected that experience and we graded them on it. So if I see Schwab’s number all over that site, and then I call it, and I can’t get the help that I need and I am waiting for 10 minutes to get connected, then what kind of user experience is that, right?
There are some brokers on the email side. There was a tie this year, it was TradeKing and Cobra Trading who had…

Zack: I have to admit, I have never even heard of them.

Blain: We try to include as many brokers as we can. Cobra Trading is a very small broker, not many people have heard of them. But Cobra Trading and TradeKing had the fastest email reply, it took 3 minutes. So when we clicked ‘send’, to getting a reply with an answer, with a template, a lot of these brokers have templates…

Zack: That is insane. That is what I was going to ask, if it was an automated reply?

Blain: Yes, they will usually give you an automated reply, ‘We have received your email and we will get back to you within 24 hours’ or whatever it may be, but to get the actual end result, and these two brokers tied for it. We were just like, ‘Wow!’
Then you get brokers who will take a week or longer to get an email back. SpeedTrader, I will pick on them. It literally was 14 days, 23 hours and 49 minutes to get back to us for one email. It’s not like we’re asking, ‘Can you tell me about the technology behind this?’ or ‘How does the execution process work?’ It was simple like, ‘What is this commission rate?’ or ‘Is this fee applicable for this?’ and ‘How do I get the platform?’

Zack: Wow! It is not even serious at that rate. They shouldn’t even offer email service.

Blain: Yes, to your point, they shouldn’t. We tell the brokers this. We try to emphasize that if you are going to focus on one support recommendation for brokers, and then do it great! Don’t put your eggs in all of these different baskets, don’t offer live chat if you know or are not confident that you can offer that feature-rich experience that your clients deserve.
You’ll see brokers that hone in on certain areas, and they either execute and are okay with it, or they don’t. That is why you see our best-in-class this year really executed well.
The last example will be Scottrade. It was so cool. If you call into their support during market hours, the automated thing asks for your zip code and then it immediately redirects you to your local branch office. I’m sure you’ve seen the Scottrade commercials, right, Zack, where the guy is on the rich boat and you want to talk to a broker. Through this experience, it was like, wow, they won the best overall client experience this year. We thought, wow, this is really what the emphasis is in their commercials because we get referred to our local branch office. The guy picks up immediately, and I felt like I was talking to a broker. He said to me, ‘Yeah, if you go to the Scottrade website, you can…’ It was like his own website. He said, ‘Our commission is this.’ It really made for such a unique client experience, and Scottrade was the only broker that went this specific route. They put all their weight on their branch offices to say, look, connect with them locally. As a client, it makes me think, wait a minute, number one, I have a local branch office close by, cool! You know what I am saying? It might incentivize me to open …

Zack: That is very good from a channel management point of view. Very smart.

Blain: Exactly. It is pretty cool when you really dig in and see what these brokers offer. You have to do it by testing. You have to call them, you have to chat with them, you have to call them at random hours and wait 15 minutes on cue to get a hold of someone to really figure out how good they are.

Zack: Blain, thanks so much for joining us today. This is Blain Reinkensmeyer, who runs Stockbrokers.com. You can find the 2012 Online Broker Review on your website, right? It is on the homepage as well?

Blain: Exactly, yes. Zack, thank you so much for having me on. It was a pleasure.