Is Zecco.com Any Match for Wells Fargo and Bank of America?

I’ve had some good feedback on my review of Zecco.com, the online broker with free trades. I was pretty evenhanded: Zecco does offer free trades as promised and their order execution was reasonable; however, I experienced some problems with withholdings and wasn’t happy with the reporting. In the end, the withholding was recorded in the monthly statement and it was already forwarded to the IRS by Penson Financial (Zecco’s clearing firm) by the time I had all my paper works in. This is a big motivation for me to file my taxes as soon as possible this year. I haven’t made further trades with Zecco although the account is still open. I’ll re-evaluate the situation after I get my tax refund.

In the meantime, Zecco has been making improvements as described below. They cannot come at a better time as the competition for “zero commission” is heating up.

Zecco now offers IRAs
This is a new offering from Zecco. Roth IRA, traditional IRA and rollover IRAs are now available. The same free trading applies to IRA accounts as well. I’m still trying to get a clarification as to whether one can own a taxable account as well as an IRA account and get free trading in both. There was a rule that one cannot own more than one account (e.g. individual + corporate) and get free trading in both.

There is a serious drawback though, in that Zecco is charging an annual fee of $30 for IRAs. While it is not a deterrent for frequent-traders, it will be a big put-off for those who are price conscious and plan to adopt an ETF based index strategy, especially since there are so many other online brokers that offer no fee IRAs.

Virtual Trailing Stop Orders
A virtual trailing stop order [VTSO], is a stop order that adjusts as the price of a security moves. What you do is you enter a stop price is placed at a set distance above or below the market price, depending on whether it is on a long or short position. And, the stop price then adjusts upward as the stock appreciates, maintaining the set distance. The purpose of this order is to maintain a set level of potential loss at any point in time while allowing for continued appreciation as long as the price does not fall to the stop loss.

Say you’re long stock ABC which is currently trading at $100, you want to protect yourself from a decline in the stock price, i.e. either protect existing profit or limit potential loss. You could enter a stop order (A stop order is an order that becomes a market order once the stop price is reached. For long positions, it’s a sell order below the current price; for short positions, it’s a buy to cover order above the market.) at $95 which limits potential loss to $5 per share from current levels, any slippage notwithstanding. However, if ABC appreciates to $120 and you haven’t kept up with your stop, you’re now opening yourself to a potential $25 decline.

This is a concern for those who can’t monitor their stops constantly. Don’t worry, trailing stop orders come to the rescue. Zecco’s implementation is a fixed distance trailing stop. In the above example, you enter a VTSO at $5 (note, not $95! This was confusing giving their interface. See this tread at the Zecco forum). As the stock appreciates, the stop price is lifted, always at $5 below the high after the order was entered. In the above example, when the stock makes a new high at $120, the stop would be at $115. This way, you still benefit from appreciation in the stock, and your gains will never slip away more than the pre-determined amount.

Trailing stops are best after an extended move when you want to protect your profit. Using a tight stop during a period of consolidation may get you out of the stock prematurely only to see it taking off without you.

Some online brokerages such as TD Ameritrade (AMTD) implement trailing stops using a percentage off the high. There isn’t a big difference between the two. Granted more sophisticated implementations would also allow a limit order instead of a market order to be triggered, this is still a big improvement from Zecco and I applaud their effort.

The competition is heating up
As implied in the opening paragraph, even “zero commission” is not immune to competition. Previously, I have mentioned Bank of America (BAC) which offers 30 free trades/month (vs. Zecco’s 40 free trades/month) in a dozen states around the country. One catch is that you have to have $25k in deposit accounts with them. The drawback is that BoA imposes a $50 semiannual “brokerage account maintenance fee” for accounts under $50k, so the deal is not attractive to investors with low account balances.

The latest contender is Wells Fargo which is offering 100 free trades/yr when the equity in the brokerage account meets a minimum of $25k. There are no minimum deposit account requirements. What sets it further apart is that many no-load mutual funds are also eligible for commission free trades. Trades beyond the first 100 cost $5.95 each which is also reasonable. With this offer, Wells Fargo (WFC) has leapt to the front of the pack among ultra-low commission brokers in my opinion.

One of the main concerns with Zecco is how unproven it is. Even though the accounts are FDIC insured, no one knows how long it would take FDIC to respond if a catastrophic event does happen. On the other hand, both Wells Fargo and BoA are 1st class institutions. I hope Zecco can respond to this challenge. Competition can only be good for us individual investors.

Now for some idle speculation completely unrelated to online brokerage comparisons. If you’re wondering why Wells Fargo suddenly became so generous, or whether HSBC (HBC) can make any money by offering a 6% interest rate on their savings account, my over-active mind has a theory. It is well known that consumer deposits are among the cheapest financing channels for banks. Is it purely coincidence then, that Wells Fargo and HSBC Household Finance top the list of subprime lenders according to this website? While I’m not suggesting either is going out of business, or their account holders are in any danger (HSBC is something like the #3 bank in the world and Wells Fargo is the highest rated bank in the US), the timing does strike me as a little too coincidental. It is entirely possible that their subprime lending divisions are under pressure and they want some extra liquidity to ensure that nothing “unexpected” happens. Just food for thought.

Comments

[Malkiel:]

Interesting point about the subprime lending.

One of my other brokerages recommends against counting on trailing stops, the reason being that the underlying mechanism of execution depends greatly upon which automated subsystem in which exchange handles the transaction. Some subsystems may still depend upon manual matching by specialists who control the stock; others will have no means of matching your price if it's falling too fast.

I find that Zecco has been improving and since it has Penson working its backroom stuff I have no fear that it is somehow less "legitimate" than other brokerages. I don't find the $30 IRA fee unreasonable given that all of the trades are free.

It's been interesting how the mainstream financial media doesn't even want to mention Zecco when they do their pieces on falling brokerage fees, as though they are afraid to cause a stampede that will upset their paying advertisers. But it won't stay hidden forever, because free is good when it's real...

2007 Feb 20 10:22 AM

[User 123535:]

STAY AWAY FROM ZECCO!!!! I have a Zecco account that I started about 5 months ago. Zecco’s customer service went from bad to worse. The prices went from great to comparable to other brokerages. The platform went from basic crap to still basic crap. The forums went from community members opinions to only what the editors approve. If it could negatively affect Zecco (something that is almost always true) it will be deleted as if it never existed. The company is a scam. GO TO THE BBB WEBSITE AND CHECK OUT ZECCO’S “F” RATING!!!! I loved it before and recommended it to many. I now recommend everyone to stay away.

2007 Nov 17 11:02 PM

[esquire415:]

Zecco was great when most of it was free. Now you have to have $2500 equity in your account in order to get 10 free trades a month which is a HUGE (75%) cut from the original 40 with no minimum balance requirment. Also if you go over your free trades, they charge $4.50, up $1 from the original $3.50

In addition, Zecco didn't use to charge $30 maintenance fee for IRAs and $30 closing fees. This is a typical bait and switch business tactic. I got lured in as soon as they took out the $2500 minimum requirement for free trades only to put it back in and decrease my free trades once they got my money. And part of their slogan even said that the original offer is "not an introductory offer". What irks me most is that they do not have the balls to admit that they are not making money. They tell us that only 2% of their customers trade more than 10 times a month. Well if that was the case then that 2% should not affect their bottom line. Why make 98% of their customers suffer? Why the drastic additional and increase in charges? They would have been still good if they met their customers in the middle by decreasing the minimum requirement to a more reasonable $1000, providing 20 free trades, and $15 annual fee for IRAs. They can't really claim zero commission costs anymore....perhaps "almost zero commission costs"

Oh yes, and their forum sucks. The other poster is right. They remove posts on complaints and and technical issues about Zecco. They even once provided a board for it and totally deleted it. They also would not let you post suggestions in public.

2008 Mar 14 10:03 PM

[User 185247:]

I was probably one of the first 100 customers when Zecco opened to public. Initially I didn't mind their disorganized website, poor execution prices & sloppy accounting practices. Because what to expect with 0$ commission? But lately I am getting very annoyed with accounting practices at Zecco. They are often changing execution details in history. For example if my stock wmt got executed at cetain price & sattling money is Y dollars, few days later they change Y to Y* without informing me.

Biggest problem which is causing me to finally close my account:

Zecco is notorious in cash transfers. I have been using same account for transfering cash, but every few months, zecco gets a reject on ACH for NO MISTAKE OF CUSTOMER, and they charge customers $25 each time. I discussed occurance of 3 such charges with Zecco but they are unwilling to refund the charges.

It happened 4th time, this time I asked them to investigate as I have been using same account for cash transfers for last 1 year with more than sufficient balance. The account manager was EXTREMELY RUDE to even accept their mistake. She accepted that ACH was erroneous but it was not Zecco's fault so customer has to pay!!! And while investigating, she blocked all my accounts for closing positions only - means I can sell but I can't buy anything.

It ticked me off real bad, why should customers pay for mistake of Zecco or ACH! I am filing FTC complaint as well. I have decided to take my account elsewhere. As usual account manager "DOESN'T CARE" about my $50K account. Account manager won't refund $25 for THEIR mistake, but is OK to let me go....

So I submitted my account transfer application w/ BOA.

2008 Apr 29 07:03 PM

[Posideon216:]

I am sorry to hear horror stories like the two readers before me. I called their customer service and talked to their techs, and invested with them.
I recommend trying them out. They've built a nice community of investors, and allow us to share our positions and moves. It really creates for a vibrant learning environment.

David

2008 May 25 01:54 AM

[Posideon216:]

Here is a referral link for a free book when you sign up.
friends.zecco.com/r/19...

2008 May 25 01:55 AM

[User 364255:]

ZECCO IS HORRIBLE.

With the new pricing structure, there is no advantage to Zecco, and many disadvantages. As previously noted, their customer service is horrible. The "traders" don't even know SEC rules, or the difference between having a margin account and actually USING margin! If they don't know basic things, why would you trust them to handle your money? Their management is no more knowledgeable. Their accounting records are confusing and I am actually having an accountant look them over to see if they stole money from me. Please, do yourself a favor and don't use them.

Feb 25 01:46 PM

[User 414960:]

Wellfargo trading platform has it's own issues. No Trailing stop order or stop loss order. That's really disappointing as the only option they has limit order. I recently started moving away from Fidelity accounts. Looks like, I mad a bad move.

May 16 10:49 AM

[esquire415:]

I would have loved WellsTrade with their 100 free trades including mutual funds. However, their mutual funds list is not as comprehensive as some brokers. I have been asking for a trailing stop feature for I trade many stocks and this would be handy in a volatile market but it doesn't seem like they will add this feature in the near future. The best you can do is put a stop loss order.

Zecco is even worse now since my last post. Since March, they require $25,000 equity before you can make 10 free trades....yea $25k from $2,500k....that's a freaking 1000% increase, and even if you reach that amount, it's not even an unlimited free trade. They really screwed up the many small investors they have which is their customer base. They practically eliminated free trades and now charge $4.50 per trade. The only real advantage they have over Wells Fargo is the trailing stop feature. Otherwise...they are crap! Ironically, when they first started, they criticized BofA's and Well's high minimum equity requirements to obtain free trades and now they are taking a punch in the gut for it.

Jun 02 03:04 PM