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Big brokers' Net woes
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February 26, 1999: 5:36 p.m. ET
Are moves by full-service firms 'baby steps' in race to catch online rivals?
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NEW YORK (CNNfn) - It may not be a David-and-Goliath struggle, but many full-service brokerage firms look a bit like lumbering giants compared with online investing rivals.
Many industry experts believe the full-service firms have fallen behind smaller, more nimble competitors in allowing clients to trade over the Net.
Charles Schwab & Co., the nation's biggest online broker, E*Trade Group and others are changing how Americans invest while the big firms struggle for a toehold.
"Until just before Christmas, the big brokerage firms had tried to ignore it, as though it was some annoying insect that would eventually fly away," said Phil Leigh, Internet analyst at Raymond James & Associates, a St. Petersburg, Fla., brokerage. "Now it's gotten their attention. But most of them are very slow to respond, and there isn't much time."
Online investing is relatively easy as well as cheap - from $8 to $30 for a $4,000 trade vs. $100 or more at a full-service firm. Last year about one in seven stock trades was online, up 50 percent from 1997, and rapid growth should continue, the experts say.
The big firms have been "paralyzed" by fear of angering their in-house brokers, said Bill Burnham, online analyst at Credit Suisse First Boston.
Big firms struggle to fight back
The big firms do have huge pools of cash, technical expertise and retail brokers to offer advice. And their assets in customer accounts dwarf those at online firms.
Two big firms already own online brokers - Morgan Stanley Dean Witter (Discover Brokerage Direct) and Donaldson Lufkin Jenrette (DLJ Direct). And others, including Merrill Lynch & Co., the nation's biggest broker, and Prudential Securities, plan to offer online trading later this year, though only to a fraction of their clients.
"It's been a very bitter pill for these folks to swallow but they're finally doing it," said Elizabeth Rowe, financial services expert at Find/SVP consultants.
The bitter pill is letting customers trade online, since that could anger thousands of brokers who earn big bucks for themselves and the firms advising Americans on stock trades.
The big firms say they have strategies in place. Morgan Stanley (MWD) points to its purchase of Discover Brokerage Direct two years ago. "We recognized early on that some customers don't want advice" but rather a quick, easy way to buy and sell online, a spokesman said.
DLJ Direct, which recently got high marks in a survey of online firms, is testing a dual system of less expensive trades made online without a broker's advice, analysts said.
The big firms are also betting that wealthier, more lucrative clients with complex finances will want to stay with them for advice on stocks, estate planning, taxes and other issues.
"The whole game is to provide the client with what they need while enhancing the relationship," said Murali Balasubramanian, a vice president and director of technology initiatives at Prudential Securities. "It's information overload unless you've got an intelligent way to filter it."
'Baby steps' toward online trading?
Prudential and Merrill have added a host of services to their online sites -- letting customers track their accounts, get research reports and even pay bills -- yet they don't allow them to trade there.
That's changing.
Prudential is testing online trading with about 300 clients and expects to offer it to all customers by year-end, Balasubramanian said. Fees for the rollout are not set, he said, adding it's "not to compete with the online services at all."
Merrill (MER) plans to offer online trading to 55,000 of its best customers next month, or 1 percent of its 5 million retail clients. About 400,000 customers use Merrill's online site and the firm got another 100,000 responses to an offer of free Merrill research that started in November.
"This medium is definitely important to us," spokeswoman Selena Morris said. "We're not a kind of dinosaur or anything." She said there is no firm date to offer online trading to more Merrill customers.
In a bid to speed its entry into the field, Merrill last week agreed to buy online trading technology from D.E. Shaw for a reported $30 million.
"These are still baby steps," said James Punishill, analyst at Forrester Research, the consulting firm that specializes in technology issues. "Last year at this time if you asked me when are the full-service guys going to get online, I would have said '1998.' They're scared to death of what the Internet is going to do to full-service brokers."
Meanwhile, the upstarts are not standing still. Schwab (SCH), E*Trade (EGRP) and others have been adding customers and technology to boost trading capacity as fast as they can, and their stock prices have zoomed. They plan to expand online research and data offerings and are moving into other lucrative areas for traditional Wall Street firms: underwriting stocks in initial public offerings, for example.
Online brokers struggle too
The sailing has not all been smooth. Glitches at Schwab, E*Trade and others have brought a jump in consumer complaints and sparked concern among regulators. In response, the firms have put limits on how the most volatile Internet stocks can be traded online.
"There's been so much learning on the job for the small firms, and that's hard to replicate," said Credit Suisse's Burnham. "It's not the kind of environment the full-service firms are used to. It's like asking horse-racers to drive Ferraris."
Not everyone in the industry says the full-service firms are turtles.
"What they're doing makes perfect sense," said Jan Holman, financial services expert at American Express Financial Advisors, who sees firms moving gradually because of concern for brokers and their relationships with customers. "It's easy to be critical. But what we're seeing right before our eyes is the evolution of the brokerage and financial-services industry," she said.
The bottom line will be lower prices and better service for consumers, analysts said.
"Until six months ago, it appeared the Internet brokers were on the periphery," said Leigh at Raymond James. But since then Americans' appetite for investing online has grown and two titans from the traditional brokerage industry jumped into the fray.
Sandy Robertson, founder of Robertson Stephens, in January bought into the online investment bank formed by E*Trade (EGRP). Just 19 days later, William Hambrecht, founder of Hambrecht & Quist, created a new company that wants to open up the clubby world of IPOs, especially in red-hot tech issues, to average investors.
"What they're saying is the conventional firms are waiting too long," Raymond James' Leigh said.
-- by staff writer Steven Radwell 
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