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Review: Scottrade IRA

Update: Over the last couple years, several brokerage firms have begun offering entirely commission-free trades on stocks and certain ETFs. As a result, for most investors these days, I’d suggest using a different firm rather than Scottrade. (See here for why we’ve moved our money to Vanguard.)

Back in 2001, I opened a Roth IRA with Scottrade. I kept it there for several years, and for the most part, I was quite happy with it. After all, there’s plenty to like about Scottrade:

  • They offer low-cost purchases of ETFs and other stocks–it’s been $7 per trade for several years,
  • Their online interface is easy to use,
  • There’s no annual fee for having an IRA with them,
  • Their customer service is pretty good, and
  • They offer access to tons of no-load mutual funds.

So why don’t I use Scottrade anymore?

One reason: They don’t allow for automatic reinvestment of dividends with ETFs. Every time an ETF pays you a dividend, that money will sit in cash until you pay another $7 to invest it. And even if you don’t mind paying $7 to reinvest your dividends, Scottrade doesn’t allow for the purchase of fractional shares, so you’ll have a little money sitting in cash regardless.

Important note: With regular open-end no-load mutual funds, Scottrade does allow for both:

  • Free, automatic dividend reinvestment, and
  • Fractional share purchases.

Would I recommend Scottrade?

That depends on what you intend to invest in:

  • If you intend to stick with your typical no-load mutual funds, then yes, I think Scottrade is a great place to invest.
  • If, however, you intend to invest via ETFs (or other individual stocks), there’s no reason to have your money sitting on the sidelines when you could just go to a different brokerage firm — Vanguard, for example — and sign up for (free) automatic dividend reinvestment.

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