LOYAL3 Review – Stock Market Investing for Beginners

LOYAL3
Review of: LOYAL3
Reviewed by:
Rating:
3
On October 14, 2013
Last modified: June 28, 2014

Summary:

Buy or sell stocks for FREE through LOYAL3.

LOYAL3 Securities is a new entry into the discount stock broker niche, but much different than the other brokerage firms we’ve reviewed previously. With traditional stock brokers, you pay a commission every time you make a trade. You buy a stock, you pay a commission. You sell a stock, you pay a commission — you get the idea. With LOYAL3 all trades are free!

LOYAL3 has no hidden fees. That’s right, you don’t pay a penny for the buy/sell orders you make. It’s been stated that LOYAL3 gets the company you are buying or selling to pay for any transaction fees.

So the amount it costs LOYAL3 per transaction is very minimal. The company was founded in 2008 and got a C round of venture capital totaling $18 million, so they are currently very well capitalized.

LOYAL3 Securities, Inc. is member FINRA and SIPC. Obviously, since you are purchasing stocks there’s no guaranteed return and your investments are NOT FDIC insured.

How Does LOYAL3 Work?

LOYAL3 is targeting the beginner investor, so with their service, you purchase stocks in many well-known companies or stock IPOs (Initial Public Offerings). You can start investing with as little as $10. For stock IPOs, you need a minimum $350 account balance.

I’m not sure why LOYAL3 has this limit, but you can only purchase up to $2,500 per stock per month. Granted, for most investors this should be more than enough, but an odd limit none-the-less. Since many stocks are more than $10, you can purchase fractional shares.

The signup process was quick and easy. In three steps, I was able to order Apple (AAPL) stock in less than ten minutes. You can place a one-time order or schedule monthly investments from $10 up $2,500.

LOYAL3 Stock Purchase

Buying shares of Amazon (AMZN) is easier than ordering on Amazon.com

You can either link a checking account or you can use a credit card — which I find interesting and is the only brokerage firm I know of that offers this option. So as a savvy investor, it’s possible to leverage credit card reward programs and make as much as 5% instantly on the transaction.

Obviously, I’m not suggesting you should go into debt when purchasing stocks, but if you were already planning on making the purchase it’s an easy way to rack up credit card points.

How Does LOYAL3 Do This for FREE?

There’s no such thing as a free lunch, so this offer doesn’t come completely catch-free. The first limitations are that orders aren’t completed in real-time. A stock purchase might take a day or so before it’s executed. They do this to reduce the fees they pay for your order, by pooling all of their transactions into one big order.

I also suspect, another possible way they save on transaction fees is pool orders between customers within LOYAL3. This means if you are buying, say, Apple stock, it’s possible someone else within LOYAL3 also wants to sell shares of that same company at the same time. This saves them having to go onto the exchanges and becomes an internal accounting task.

Just be aware when purchasing you aren’t getting the best price of your purchase, nor can you time the purchase of your shares. If you are long-term investor, it shouldn’t make a huge difference.

The trend in the industry is geared towards cheaper and cheaper execution costs. If you’ve been around long enough, you would remember twenty years ago, a discount broker was considered any trading fee that costs less than $50 per order. We’ve come a long way since then.

We’ve come close to the bottom of traditional trading fees without having to put restrictions on the order like LOYAL3 does. Also keep in mind this idea of free trades isn’t completely new. Many brokerage firms offer commission free ETFs.

In addition, there was a company called Zecco that allowed all trades to be free. A few years later they realized this freemium business model didn’t work and then restricted to a maximum amount of ten trades per month. Zecco eventually merged with TradeKing. I’m not suggesting LOYAL3 will have the same fate as Zecco — just that this concept isn’t completely unique.

The other limitation is the stocks available on their service. LOYAL3’s list currently comprises of 56 companies. Some are great long-term investments, like Coca-Cola (KO). While companies like Blackberry (BBRY) I wouldn’t touch with a ten-foot pole. Don’t expect diversification when using LOYAL3’s service.

While they are targeting beginner investors, I find it odd their service offers IPOs. It’s great they are encouraging individuals to own stocks, but IPOs are typically not something you should invest in when just starting out. Historically, IPOs are a risky bet and on average net losers.

It’s not widely known, but for many Fortune 500 companies, you can purchase their stock directly via a DRIP ( otherwise known as Dividend Reinvestment Plans). Interestingly enough, I know ExxonMobil (XOM) offers a DRIP program but not listed on the LOYAL3 web site. Coca-Cola (KO), which is listed, does offer a DRIP program. I’m not sure how LOYAL3 selects the stocks or the companies, but it would make sense if they offered all of the dividend aristocrat stocks on their service.

The Good

  • FREE Stock Trades — Did I mention that buying and selling stocks are free?
  • Easy to Use Interface — Buying or selling Amazon’s stock is easier than placing an order on Amazon.com
  • Focus on The Beginner Investor — LOYAL3 focuses on the beginner investor and requires little money to start

The Bad

  • Limited Stock Selection — You can only pick from currently 56 different corporations
  • No Retirement Accounts — While it’s great they are focusing on the beginner investor, no IRA accounts are available
  • No Investment Guidance — LOYAL3 doesn’t offer any way to asset allocation your investments
  • Delayed Buy/Sell Execution — Granted you aren’t looking to time the market, but your order can take over one day to complete
  • IPO Investments — I don’t understand why they are offering IPOs since beginner investors aren’t that target audience

Summary

LOYAL3 is an interesting way to invest, since LOYAL3 doesn’t charge a fee for stock purchases. It’s a cheap way to get started investing in the stock market. Though currently the amount of stocks available is way too limited. Additionally, if LOYAL3 is targeting beginner/casual investors, I’m not sure why they are promoting IPOs. While IPOs are sexy, they are usually not appropriate for the beginner investor with little to invest.

LOYAL3 also doesn’t help with asset allocation — an important aspect for long-term success. Betterment in my opinion is a better option for beginning investors than LOYAL3.

Unfortunately LOYAL3 currently doesn’t offer retirement accounts, so any investing you are doing is with mad money. They did create a DRIP style of investing service in a nice slick web interface and made it super easy to invest in stocks. I would increase my rating of LOYAL3 if they offered much more investing options, and more investment guidance to the beginner investor.

Disclosure: For purpose of testing I have signed up with LOYAL3 and invested $50 with them.

Comments

  1. Giao Nguyen says:

    “So as a savvy investor, it’s possible to leverage credit card reward programs and make as much as 5% instantly on the transaction.”
    Just wondering: Where did you find a credit card with 5% cash back? Many thanks.

  2. DW says:

    Great review! You should include the ability to invest using credit card under the “Good” (that is the main advantage), as well as ability to buy fractional shares (dollar cost averaging). They offer and promote IPO because that makes the most money for them and helps keep the free trades sustainable. Most of the stocks offered as Consumer staples, consumer discretionary, and tech stocks. It is possible to build a more diversified portfolio by combine this with DSPPs to add utilities, industrial, material, healthcare, energy, and financial stocks.

  3. Jason says:

    Thanks for the review! I’m an experienced investor thinking of using Loyal3 to invest in Berkshire.

    In response to the question of DRIPs, I looked into them recently and remembered why I never got into them twenty years ago: the vast majority are complicated, inefficient, costly, and (the biggest issue) raise the risk of your portfolio being overweight by the particular stock(s) you might choose to DRIP. Sharebuilder offers a good alternative, though again, you have to commit a decent chunk of change to make it cost effective. Most new investors aren’t there.

    And speaking of free commission brokers, another one called Robinhood is going to have a go at it. They haven’t launched yet, but you can get your name/email added to their list to be notified.

    • Larry Ludwig says:

      Hi Jason,

      On that waiting list as well for Robinhood so we can add to our lists of reviews.

  4. DW says:

    Hi Jason:

    Robinhood sounds like a good idea, but loyal3 is far better because, unlike Robinhood, it allows you to buy stocks using credit card, buy fractional shares, and charges no ACAT fees. Get a Capital One Quicksilver credit card and you get 1.5% cash back on your investments. The ability to buy fractional shares and invest a fixed dollar amount allows dollar cost averaging, which tends to give you a lower cost basis in the long run. No fees is priceless. Robinhood charges $75 for outgoing ACAT, which is problematic if it starts charging commission once it accumulate enough client assets, just as Zecco did a few years ago. If you want another no commission broker to buy stocks not offered by loyal3, Merrill Edge is a good choice, giving you 30 free trades every month, which is plenty for me.

    • Jason says:

      DW:

      Good thoughts. What’s “better” for someone depends on their situation and needs. Loyal3 has a very limited selection of stocks, but if one of them happens to be a company you want to invest in regularly (like I do with Berkshire Hathaway), they certainly seem to be the way to go. For a wide selection of stocks, Sharebuilder (also a Capital One product) also provides the benefits of dollar cost averaging with fixed dollar amounts. It’s not free, but it is a very good value especially because the cost structure encourages regular, disciplined investing.

      Regarding Robinhood’s $75 outgoing transfer fee, that’s pretty average for brokers. Most brokers also reimburse their competitors’ outgoing transfer fees to attract new accounts. Still, good to avoid surprises and be aware of it up front.

      Merrill Edge requires $25,000 in cash held at Merrill or Bank of America to earn free trades. The fine print is specific about “cash,” so I take that to mean other assets do not count. If that’s true, you first need to have the cash, and then be willing to give up $200-300 annual interest income in return for the zero-commission trades. It’s a good value for active investors with that kind of cash sitting around. Definitely not an option for me.

  5. Difu Wu says:

    Hi Jason:

    I agree loyal3’s stock selection is pretty limited, but it is still possible to build a well-diversified portfolio from it, supplemented with certain DSPPs that charge no fees. For example, I use loyal3 to invest in BRK.B, KO, PEP, BUD, INTC, MSFT, VFC, NKE, MCD, MAT, WMT, UL. This has only consumer, tech, and financial stocks. Then I also enroll in no-fee DSPPs in BDX, XOM, AFL, BMTC, NSC, LMT, EXC, YORW, SON, MOCO for a diversified portfolio across all sectors.

    Sharebuilder is good for a one time $50 bonus.

    I have an account with Merrill Edge for a year now and it’s been great. The fine print says you can qualify for free trades with $25000 in cash deposits (a bad idea as you astutely pointed out), or you can also qualify with $50000 in assets (cash, stocks, bonds, or any securities) held at Merrill or BofA, which qualifies for “Platinum Privileges”, which in turn qualifies for 30 free trades per month. You do need to open an eChecking BofA account in order to qualify and to deposit funds into your Merrill Edge account. I maintain at least $50000 in Merrill Edge brokerage account, which is essentially all stocks, and have only $1 in my BofA eChecking account, which I link to my primary, interest-bearing, checking account with Ally.

    Robinhood is promising, but offers nothing new. I suspect it is just a marketing scheme to attract client assets with the free trades, then suddenly starts charging commissions once it builds a big enough asset base, just as Zecco did. Loyal3’s free trades may not last forever either, but at least there is no ACAT fee if the free trades end.

    • Jason says:

      True, and BRK.B in itself offers excellent diversification and management. Since Berkshire doesn’t offer a DSPP, it’s awesome to see they are working with Loyal3. The stock is at the right price according to Buffett.

      Thanks for the clarification about Merrill’s offer. I’m not at the $50k mark yet, though it’s a near-term possibility. I inherited Schwab through a rollover and stayed with them after looking around. By investing about 2/3rds in their ETFs and the other 1/3rd in a few stocks, the costs are very competitive. I’ll definitely consider going to Merrill if the offer still stands in a few years, especially if a good selection of low-expense index ETFs are available.

      Robinhood is following a similar strategy to Zecco, though one key difference is they’re leveraging mobile first, and seem more focused on doing one thing well. Zecco pre-dated the mobile tech boom, had a clunky website, and seemed like they tried to do too much. Speaking for myself, free trades were the only real draw. I think if RH can develop some paid services (research, technical analysis, etc.) the strategy could work. Whether it works or not, it’s great to see the innovation at work.

  6. Carlos @ TheFrugalWeds says:

    In terms of simplicity, Betterment is also great, but you are restricted to their prefixed ETF’s. Not a bad thing, but the wife and I were looking to get specific stocks. As a beginner, we like Loyal3 for that, and it is truly free of any costs. Being able to use credit cards to make purchases is a huge benefit too, especially for those looking to stack credit card rewards up.

  7. Peter Robbins says:

    Loyal3 sounded so promising, especially on the GoPro IPO. I put up $2500 well in advance because I wanted to be on the same playing field as the big boys, wouldn’t you? However, as the date approached, you were made more and more aware of the allocation logarithm that cautioned you may only get $100 worth of stock? Huh? One might speculate that the underwriter wanted a way to put more pressure on the big boys to get in. Yup. After the closing price was announced, I was emailed that I would get $300 worth of stock. Golly, 12 shares! Oh, boy! So, to all the other folks that believed in “Loyal”3, welcome to the saps club. I believe there over 23,000 “Likes” for Loyal 3 on Facebook. Frankly, you’re being used as a tool for the underwriter. All the BS about being able to play with big boys is a scam and crapola. The Barry Schneider (CEO of Loyal3) quote is rubbish. Nick Woodman’s heartfelt invitation to “all who helped get us there” is a pile of steaming horse poop.

    • Ana says:

      Couldn’t agree with you more! Their batch buying technique with 3-4 day hold on trade acquisitions sucks like no other! Did the gopro ipo offer at 24, but since they drag ass and didn’t close the purchase till 4 days later, my 100 shares were now just 54! Not big $, just a total bait but while the big dogs keep playing the public. Stay away from Loyal3! Rather pay commission and know that the trade takes place the moment I pull the trigger…not days later when the market rollercoasters.

  8. LH says:

    Nor really a good place to learn about investing in iPOs. Even with a reservation and an amount your willing to spend more than likely you will only see a very small fraction of what you hoped to invest. LOYAL3 wants to be democratic when it comes to this type of investing. Everyone gets something – so basically if your wanting to be in on the ground floor and learn about investing don’t do it with LOYAL3 and IPOs. I put in a reservation for what should of been over 40 shares in an IPO. Instead I got 7 shares.

  9. hal says:

    Misleading advertising and E-mails, bordering on fraudulent.
    The GPRO IPO was being described “First come, first serve” which to most means thet these at the front of the queue get the full allocation requested, others get nothing. Instead, after much confusion on the IPO day everyone got a small fraction (typically 5-8%) of the requested allocation. LOYAL3 help desk would not disclose how the shares were allocated, claiming their allocation algorithm is “proprietary”. When trying to place the sell order for the pitiful fractional amount of shares allocated the confirmation screen shows a stale (previous close) stock price and has you agree to the estimated total amount that in that case was $4 per share below the market price. This would be a joke, except it is not funny….

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