Although Interactive Brokers is widely used by worldwide institutions and hedge funds, many individual investors have never heard of or used Interactive Brokers and may feel uncomfortable with it, so we have a web page help clients get familiar with it, and we want to use this post to explain in more detail why we choose Interactive Brokers as clients’ brokerage account custodian.
Since we actively manage all portfolios, various portfolios can hold between 50 and 120 stocks, and some of our client accounts have balance as little as $100,000, it is important to select an account custodian with lowest trading cost and best trading technology for our clients.
(1) The most important factor in choosing a custodian for our clients is trading cost. According to Barron’s 2011 broker’s ranking, Interactive Brokers ranks #1 with 4.5 stars in term of cost. Other popular custodians like Fidelity, TD Ameritrade, Schwab, and E*Trade got 1.8, 1.3, 1.2, and 0.8 stars respectively. In addition, according to “Technical Analysis of Stocks & Commodities” magazine’s 2011 Readers’ Choice Award, Interactive Brokers ranks #1 in all three (stock, futures, forex) brokerage categories as well.
Using one client account with $103,812 in value as an example, 124 trades were made in March 2011, with total 19316 shares were traded, and trading cost was $113.3, which represents 0.109% of account value. Average shares per trade is 170.495 shares, and average cost per trade was $0.914. Since this account size is small, using other custodians like Fidelity, TD Ameritrade, Schwab, and E*Trade could have cost 8 to 10 times higher than Interactive Brokers.
(2) Another important factor in choosing a custodian for our clients is trading technology. According to Barron’s 2011 broker’s ranking, Interactive Brokers ranks #2 with 4.7 stars in term of trading technology, slightly below TradeStation’s 4.8 stars ranking. According to “Technical Analysis of Stocks & Commodities” magazine’s 2011 Readers’ Choice Award, Interactive Brokers ranks #2 in both institutional and professional platform categories as well, right below TradeStation.
Interactive Brokers’ advanced trading platform and API’s allow us to develop software solutions to manage many stocks in multiple portfolios across all client accounts with great flexibility. Interactive Brokers also provides software for clients to watch our trades and their own account balances in real time on their PC, iPhone, or Android.
(3) Interactive Brokers reports back the execution exchanges for each share traded in real time confirmations and in statements, this level of transparency in trading executions ensures us we get the best bid/offer prices. With other custodians, we have no idea if our orders are sent out to exchanges to get the best prices or not.
In conclusion, currently Interactive Brokers is the best separately managed account custodian. We continue to review all custodians on a regular basis and won’t hesitate to adopt cheaper and better custodian for our clients.
That being said, for account value larger than $5 million, we are happy to investigate the possibility to use client’s self-directed custodian.