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Tripling to $5 trillion
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October 3, 2000: 6:35 p.m. ET
Online brokers will hold one-third of U.S. stock assets by 2005, report finds
By Staff Writer Alex Frew McMillan
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NEW YORK (CNNfn) - One-third of the stock holdings in the United States will soon rest in the coffers of online brokerages, according to a report released Tuesday at the Jupiter Financial Services Forum.
By 2005, online brokerage assets will more than triple to $5.4 trillion, well up from the $1.5 trillion in accounts with online brokerages now, the report states.
Faced with that rapid growth, brokerage executives at the Sheraton New York Hotel for the financial-services forum outlined varied strategies for trapping those customer dollars. Jupiter Media Metrix (JMXI: Research, Estimates) is hosting the two-day forum, which concludes Wednesday.
Ameritrade: half a billion in advertising
Ameritrade CEO Jack McDonnell said his brokerage will spend $200 million on advertising this year. It has already spent $300 million on advertising in previous years to promote its brand, he pointed out. That's despite a six-month advertising hiatus while it ramped up its technology at the start of 1999.
 But the brokerage has been forced to suspend its popular series of ads featuring Stuart, its oddly coiffured Gen-X spokesman, because the actor who plays the character, Michael Maronna, is on strike with the Screen Actors Guild.
McDonnell said the acting strike might in fact drive advertising costs up for all online brokerages. The brokerage is about to launch a new ad campaign, he said.
There has been speculation that Ameritrade (AMTD: Research, Estimates) is a takeover target, most prominently for American Express. That grew to a head after then-CEO J. Joe Ricketts stepped down at the start of August.
Charles Schwab, founder of the brokerage that bears his name, has also told CNNfn.com that he believes Ameritrade will be taken over. But McDonnell insists that the brokerage will go it alone.
"Having spent half a billion to establish the brand, we think that we have the competitive advantage," McDonnell said. "We expect to be an active player going forward."
NDB sees partnership as strategy
McDonnell said Ameritrade, which offers trades at $8, would survive independently because it "has the lowest operating costs in the industry."
John Mullin, president of the brokerage Datek Online, quibbled with whether Ameritrade or Datek had lower operating costs. But a brokerage like Ameritrade, which charges $8 a trade, or Datek, which charges $9.99, will survive "by being a low-cost provider," Mullin said.
 Chris McQuilkin, president and CEO of the brokerage NDB.com, or National Discount Brokers, said his was one of the few brokerages that was open and happy about its partnership plans.
"We are not going to go it alone," McQuilkin said. Instead, the brokerage has sold an 18 percent-to-19 percent stake of itself to Deutsche Bank. It hopes to capitalize on areas like research, where NDB (NDB: Research, Estimates), which was formed by a market-maker trading house, finds it hard to compete.
With companies like Ameritrade spending $300 million in advertising in the United States alone, McQuilkin said, there was no way NDB could compete globally.
"It wouldn't have made sense," he said. "We don't want to outspend our competition. We want to outsmart them." That involves partnerships and selling ownerships stakes in the company where necessary, he said.
Deep-pocket brokerages shift from price competition
Other panelists with deeper pockets to draw on said their brokerages were intent on independence. Representatives from Morgan Stanley Dean Witter Online and DLJ Direct said their companies were not competing by offering cheap trades. Instead, they said they believe customers want one-stop-shopping.
Customers aren't as focused on the cost of trades, or the "price point," they claimed.
DLJ Direct President Glenn Tongue said companies with extremely efficient cost bases could make money by offering trades for free but that he didn't know "why they would want to."
 "A larger asset base is our profit plan," he said. That way the brokerage is less tied to active traders chasing cheap prices.
For instance, the downturn in tech stocks in April affected DLJ Direct's most-active traders significantly and rapidly, he said. DLJ Direct found that higher net worth clients decreased their trading immediately, too, but that they have steadily increased their trading since.
The diversity of DLJ Direct's asset base helps it in down times, he explained.
Like Tongue, Margaret Iannuzzi, executive vice president of Morgan Stanley Dean Witter, said customers seemed to prize reliability, speed and the quality of technology, as well as add-ons like research and the breadth of services.
"Price point is not really the issue," she said.
Mergers galore with small brokerages?
Tongue said the top-10 largest brokerages all had the scale to survive in a rapidly consolidating industry.
"If you're not in the top 10, it's going to become incredibly difficult, if not increasingly difficult," Tongue said. "You will see tremendous merger activity in the 20,000 to 30,000 account space."
Ameritrade's McDonnell, who pointed out that the top-10 brokerages corner "north of 90 percent" of the online-broker market, said the industry will change as the amount of money online rises to $5 trillion.
The role of financial planners will become increasingly important, for instance, he believes. He said Ameritrade plans to roll out a product for financial planners, he said, that will help them coordinate the accounts and trades of their clients.
Jupiter's research points out that any number of companies can now offer very similar online financial-services products.
Companies will struggle to differentiate themselves though customer relationships fostered by dealings with a financial planner or a money manager, predicted Robert Sterling, a Jupiter senior analyst. 
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