| SURVEY - FT-IT REVIEW: Brokers battle it out for remaining traders: VIRTUAL BROKERS by Geoffrey Nairn: Despite forecasts of 20m online investors within three years, US brokerages find competition for customers is intensifying with volumes still too low Financial Times; Nov 3, 1999 As online investing continues its meteoric rise, even the most traditional investment house knows it is an opportunity that can no longer be ignored. But the challenge now is to cater for those clients who look to the internet to deliver more than just cheap share dealing. Online investing is growing fast - so fast that Forrester Research predicts there could be more than 20m internet accounts in the US alone by 2003. By handling trades directly over the internet, upstart online pioneers found they could charge cheaper commissions and encourage frequent traders to switch to the web instead of using the telephone. The likes of E*Trade, Ameritech and Datek fought aggressively to win over these early adopters of online trading. But the problem these companies now face is that there are few frequent traders who do not already have an online account. Discount brokerages need volumes to stay profitable and with a dwindling market of untapped clients in the US the choices are stark: they must either poach customers from competitors with ever lower commissions, or attempt to expand in countries where share ownership is less common than in the US. Both strategies are risky. Forrester predicts that in five years time, 75 per cent of discount brokers trading today will have been bought or gone out of business. If the long bull run on Wall Street comes to an end, the shake-out could come sooner. Online brokers are thus seeking the higher ground in the online investment market and aiming to attract clients who may trade less often but are prepared to pay more in return for additional services - such as better price information, access to public offerings or research. "Simply being able to deal over the internet will soon become commoditised," says Eric Dickinson, business development director at TCA Synergo, a UK company specialised in software for stockbrokers. "Clients will start to base their choice of stockbroker on their ability to provide research, additional pricing information, online valuation and performance monitoring." Charles Schwab, the biggest US discount broker, recently changed its internet strategy to compete on service rather than price. It has raised minimum account balances and set its charge for internet dealing at Dollars 29.95 - three times higher than that of some discount houses. Two out of every three trades done by Schwab now come over the internet and it had 3m active online accounts at the end of September, 50 per cent higher than a year earlier. In the same period, assets under management in Schwab's online accounts doubled to Dollars 264bn. This confirms analysts' predictions that as online brokers revamp services to appeal to mainstream investors they attract clients who may trade less often but are more valuable because of their greater asset base. Fidelity is undoubtedly the best known of the mid-market brokers and its US web site allows investors to trade not just shares but also mutual funds. Forrester sees the ability to offer mutual funds online as important in bringing mainstream investors online. They are more risk averse and typically favour mutual funds rather than shares. One of the most interesting developments in the mutual fund area comes from MetaMarkets.com. The website for this San Francisco-based start-up allows investors to trade online and follow the progress of its technology fund, called OpenFund, and that of the constituent stocks in real-time. Investors can even quiz the fund managers online via the web site. "OpenFund will listen to its customers - we think we are the first mutual fund ever to do that," say the company's founders, Don Luskin and Dave Nadig. Another area where the internet is changing the ground rules is in research. In the past, only full-service brokers such as Merrill Lynch provided research and access was limited to institutional investors and well-heeled private clients. As the competition for online customers grows, more internet brokers are offering their clients research as well as news and real-time prices; a few even provide "Level II" quotes that give better information on the "depth" of the market and were once restricted to professional traders. DLJdirect, the online brokerage unit of investment bank Donaldson Lufkin & Jenrette, was among the first to offer retail investors research on the internet - DLJ's institutional clients can also access reports online. DLJdirect provides real-time news and research only to customers who maintain assets of at least Dollars 100,000 with the firm. Schwab has a similar strategy to limit access to its research to "premium" online customers. There are a growing number of news and research web sites for the online investor that are not tied to brokerages and typically charge a subscription. TheStreet.com sends subscribers an e-mail newsletter twice a day analysing events on Wall Street and elsewhere. Another popular site is Multex.com which lets users search through 300,000 research reports from more than 250 brokerage firms; the user must pay to download a full report. As the range of investor services available online grows, the expensive full-service brokers are not sure how to respond. They charge commissions of several hundred dollars on each trade and have traditionally downplayed the importance of online trading; not one full- service broker offered internet trades at the beginning of 1999, according to Forrester Research. However, online investment has now gathered such momentum that it cannot be ignored for much longer - not even by Merrill Lynch, the world's biggest full-service brokerage. Merrill Lynch plans to launch a low-cost internet channel, Merrill Lynch Direct, in the US at the beginning of December. Analysts believe the big challenge for Merrill Lynch is not competing with firms that are already online - its brand name alone is sure to win online customers - but rather preventing its existing clients from deserting en masse to the lower cost channel. Copyright: The Financial Times Limited |