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Web brokers add services
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September 29, 1999: 12:13 p.m. ET
Firms seek to lure investors with such incentives as planning, banking
By Staff Writer Alex Frew McMillan
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NEW YORK (CNNfn) - It seemed a strange combination when an online brokerage last week started offering free Internet service as an inducement for customers to sign up.
But it's not all that surprising when you consider what online brokerages will do to get your attention nowadays. They're offering extended-hours trading, low margin rates, online banking, insurance, financial-planning tools, sports scores, whatever they think might get you to use them.
So giving free Web access to customers with a $2,000 balance made sense to J.B. Oxford. The small California-based brokerage has around 115,000 accounts, but hopes to lure many more through its digital doors. To that end it's also wrapping checking, online bill paying and an ATM card into the products it offers online customers.
J.B. Oxford CEO Chris Jarratt said his company wants to capitalize on Main Street's growing acceptance of online trading. The so-called "early adapters," mainly very active traders, have all switched to online accounts by now, Jarratt explained.
But he sees a huge market of "quality customers" starting to open accounts, "people like you and me. They're people that have a mutual fund. They want to do one or two trades a year on the Internet. They're buy and hold." Internet service is his company's way of standing out to those people who don't trade that often but who he hopes want it all -- and are willing to pay a little bit more per trade for the privilege.
"We wanted to gear our products and services toward the mainstream investor," he said. "I don't think it's a gimmick at all. It's a real value. You're talking about savings of $21, $22 a month."
That wouldn't make much difference to active traders, who would be put off by fees of $14.50 for a market order, $5 more for a limit order. But Internet service is the kind of thing that could get hesitant investors to stick their toe in the water, Jarratt figures. J.B. Oxford also has an Instant Messenger-like service to walk unsure investors through the site, yet another way to appeal to the uninitiated.
Tough to compete in crowded market
With around 150 online brokerages now competing for your business, they're struggling to differentiate themselves. The industry is also changing this year, entering its second birth, as most brokerages shift away from competing on price and concentrate on offering a broad array of services. The lines are drawn as Main Street goes online.
"There's a fundamental shift going on in the industry," said Dan Burke, who compiles an online brokerage scorecard for Gomez Advisors. "The next six to nine months, I think we're going to see a lot of the haves and have nots."
Gomez pegs the potential market for online investing at 16.3 million investors, three times the current usage, in a study it conducted with Harris Interactive. With trading-volume growth among existing customers slowing in July and August, the race is on to tap new customers and gain greater "wallet share," a larger portion of investors' assets.
So while nearly all online brokerages used to sell themselves on price, many have stopped cutting trading costs and are instead promoting financial-management tools and expanded services such as banking or online bill paying to lure less active customers. And even those that still compete solely on price may need a few add-ons to keep those active traders in the fold..
Suretrade.com, for instance, primarily still appeals to a target audience of active traders -- for the moment. Suretrade is among the cheapest brokers, offering $7.95 trades and relatively low rates for people who trade on margin.
But since active investors are also the most profitable group of customers, it has to fight to keep them happy. It has set up a rapid-response support desk for the customers who rank among its top 10 percent in volume. And Suretrade has added bells and whistles such as targeted data mining, with e-mail to feed investors news on their investments or to let its top 25 percent of customers know about upcoming IPOs that match their profile.
Those services appeal to more than just the most-active traders looking for cheap, fast execution. Observers expect only a handful of the low-cost online brokers, perhaps as few as two or three, to survive in the long run. That's because the traders who make their decision mainly on price are fickle, switching when they get a better deal, as long as a site is reliable and fast.
Cheap doesn't always cut it anymore
"It's a crowded marketplace, there's no doubt about that," said Bo Davies, co-CEO of Brown & Co., which at $5 a trade offers the cheapest flat rate for online market orders. "There are a lot of firms trying to do what we do. The goal is to do it better than anybody else."
Though Brown & Co. is owned by Chase Manhattan, it has no plans to offer online banking or any of the other add-ons brokerages are into. "You don't have to be everything to everyone to be a profitable company," he said.
The story could be different within months, he said, given the industry's rate of change. But for now Brown & Co. wants to remain a lean, mean execution machine. It certainly won't go down the same path as J.B. Oxford. "There are a lot of ISPs out there," Davies said, skeptically.
But Brown & Co. may be one of the last of its breed. "I think it's slightly dangerous just to rely on transaction," said William Arnold at A.B. Watley, a small firm that's well-rated by Gomez.
Watley aims to set itself apart with rapid customer service, particularly tech support. It plans to add more financial planning tools and already lets investors download their records into the popular planning programs Quicken and Microsoft Money.
And it now offers third-party mortgages and insurance, like many of its bigger competitors. Like Suretrade, it sends out alerts to its traders on stocks they track.
"They want as much free information as possible," Arnold said.
He also thinks they want banking services. "People will want the range of [financial] products. The products are there online, so why not mix them?" he asked.
But Watley's customers will still be completely self-directed. Its version of service means giving customers the Internet tools they need to advise themselves. "There's a difference between helping and assisting, in terms of having a physical person to look after you, and having something that uses the Internet properly," Arnold said.
Advice will be the next big pitch
The larger brokers seem more confused about what market they're appealing to.
E*Trade wants to appeal to a wide range of customers by offering a broad range of products such as banking, and it is trying to get regulatory approval of its acquisition of Telebank. But it also recently introduced a program targeting active investors, with $4.95 trades for high-volume customers. As divergent as it seems, E*Trade is at the top of the Gomez rankings.
The biggest brokerages are starting to tier their customer offerings, while the smallest brokerages will go after specialty markets, analysts believe. And some expect many more niches to develop, particularly when it comes to how much advice brokerages will give. Though many brokerages avoid giving explicit advice for liability reasons, preferring to let investors guide themselves, small companies could set themselves apart by giving specific guidance.
The latest version of the Gomez scorecard, which came out in mid-September, shows the new path the industry has charged down. The top five rated brokers are not anywhere near the lowest in price -- of them, National Discount Brokers is cheapest at $14.75 for an online market order, hardly competitive with the services catering to active traders.
Instead, the services are what are distinguishing the online brokers -- as exemplified by some of the moves made recently by Fidelity.
In a deal announced Monday with Lycos to co-brand its My Lycos software, Fidelity plans to offer personalized online brokerage pages. Investors will set up a page to track news on the companies they invest in as well as on the weather and their favorite sports team. Investors can also choose to get information on new products "pushed" to them without having to request it.
Fidelity hopes it has a broad appeal. "You don't have to be a very sophisticated investor to make use of that," said Fidelity Online Executive Vice President Tracy Curvey. "It's a broader application."
Though the Lycos agreement came after the rankings were completed, Fidelity rose to 3rd from 10th in Gomez by adding tax and financial-planning tools, "a wealth of resources and features," according to Burke. Like Schwab one place above it in the Gomez rankings, it offers online bill paying and a wide range of investment products.
Fidelity also wants to appeal to active investors -- with news-flash updates and, as of October, free Nasdaq Level II quotes. But its high commission rates -- Gomez ranks it 44th on cost - seem to show it's really shooting for a different clientele.
As part of the rebranding, which it calls Powerstreet, it is introducing more tools for long-term investors. It has a retirement planner that lets investors plan their asset allocation following a series of 'What if'? questions. And in the first quarter next year, it will introduce a cash-flow analysis tool called PowerPlanner that lets investors check if they're meeting goals for saving for their kids' college, their second mortgage, and so on.
And Fidelity won't be alone. That means if you're looking to open an account, shift more of your financial services to one place, map your financial future to the nth degree, or just surf the Web for free, you're likely to have better luck than you had when the brokers were chasing active investors.
"The amount of advice, and portfolio monitoring and portfolio structuring is going to be a very hot topic over the next six months," Burke said. Cost doesn't cut it any more, he said, "and it's going to be very difficult to compete with a beat-up car when the guy next door has a nice shiny one."
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