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Newbie Merrill Edge is not the pick of the litter

Dear Mr. Berko: Your opinion, please, of the online discount brokerage merrilledge.com.

How does it stack up against Schwab, Fidelity, E-Trade, etc.? Do you personally own any mutual funds? Can you tell me if convertible bond funds did well in the past five years since the market began to fall?

Are there any no-load convertible bond funds? And would you recommend that I use merilledge.com as my broker? – W.E., Fort Walton Beach, Fla.

Dear W.E.: No! No! A thousand times no.

In my opinion, the best online discount brokerages are fidelity.com, tdameritrade.com, etrade.com and schwab.com. I trust these firms without question. Each has excellent research tools, an impressive selection of investment choices, a wonderfully simple website and very reasonable commission charges. And Charlie Schwab offers the most comprehensive list of mutual funds, including no-loads and those without transaction fees.

These firms have been in the online discount business for decades, and their experience in serving the public’s “need” zone gives them primacy over all other online firms.

However, merilledge.com is the newbie on the block. Its multiplicity of high fees will knock your socks off. Its website “sphinx” and the investment choices are as barren as Mother Hubbard’s cupboard. Its customer service, according to some, is fine, but its research is stinky and sterile (as is that of its progenitors), and its dearth of investment tools suggests that verdant management is operating on the cheap.

One would think that the evil empire that owns merrilledge.com (Bank of America and Merrill Lynch) would build an online site with more substance than chewing gum and bailing wire.

The vast majority of my investments are in common stocks. There are two reasons: I believe I can manage my assets better than a mutual fund can manage my assets. And my money is more important to me than it is to a mutual fund manager.

While my first reason is a matter of opinion, my second reason is incontrovertible. However, most investors will keep a mutual fund for two to three years because they select the wrong fund for the wrong reasons.

Meanwhile, schwab.com, tdameritrade.com, etrade.com and fidelity.com have excellent mutual fund research tools. These sites will tell you that convertible bond funds during the past five years have handily outperformed stock funds. The largest 20 stock funds, by portfolio size, last year averaged a total return of 13.6 percent versus 11 percent for the Dow Jones Industrials.

However, the top 10, by portfolio size, convertible bond funds had an average total one-year return of 17.3 percent, though every one of the top 20 stock funds had a negative three-year total return (-3.3 percent) and a positive five-year total return of 1.7 percent. Pretty bad, that. Meanwhile, nine of the top convertible funds had a positive three-year return (1.8 percent) and an average five-year total return of plus-4.9 percent. Not bad, that.

And according to schwab.com, Fidelity Convertible Securities is the only no-load convertible fund, while Vanguard Convertible charges a 1 percent fee. All the other convertible funds charge between 5.25 percent and 5.75 percent.

Many knowledgeable investors own convertible bonds because they pay a fixed rate of interest and can be exchanged for the underlying shares of the issuing company. Some believe that a convertible is the best of both worlds. It pays the interest and has the safety of a corporate bond, as well as the growth potential of a common stock.

And convertibles have been gaining in popularity as weary and wary investors look for better ways to achieve stock-like returns without taking big risks.

Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com.

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